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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
/X/ Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended October 31, 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 December 6, 2002: 9,263,503.
<Page>
PART I - FINANCIAL INFORMATION
CANTEL MEDICAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands, Except Share Data)
(Unaudited)
<Table>
<Caption>
October 31, July 31,
2002 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 13,306 $ 12,565
Accounts receivable, net 21,147 23,054
Inventories:
Raw materials 6,511 6,661
Work-in-process 2,188 1,581
Finished goods 9,074 9,089
------------ ------------
Total inventories 17,773 17,331
------------ ------------
Deferred income taxes 3,775 3,670
Prepaid expenses and other current assets 962 1,518
------------ ------------
Total current assets 56,963 58,138
Property and equipment, net 22,557 22,984
Intangible assets, net 7,610 7,788
Goodwill 16,379 16,376
Other assets 2,434 2,528
------------ ------------
$ 105,943 $ 107,814
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,000 $ 2,750
Accounts payable 6,737 6,288
Compensation payable 1,793 2,722
Other accrued expenses 5,795 6,347
Income taxes payable 1,003 2,207
------------ ------------
Total current liabilities 18,328 20,314
Long-term debt 24,000 25,750
Deferred income taxes 2,135 2,058
Other long-term liabilities 1,753 1,781
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;
October 31 - 9,533,618 shares issued and 9,263,503 shares
outstanding; July 31 - 9,491,118 shares issued and
9,221,003 shares outstanding 953 949
Additional capital 48,978 48,740
Retained earnings 12,898 11,629
Accumulated other comprehensive loss (1,910) (2,215)
Treasury Stock, at cost; October 31 and July 31 - 270,115 shares (1,192) (1,192)
------------ ------------
Total stockholders' equity 59,727 57,911
------------ ------------
$ 105,943 $ 107,814
============ ============
</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
October 31,
2002 2001
-------- --------
Net sales:
Product sales $ 26,508 $ 19,332
Product service 1,865 1,833
-------- --------
Total net sales 28,373 21,165
-------- --------
Cost of sales:
Product sales 16,361 11,998
Product service 1,242 1,168
-------- --------
Total cost of sales 17,603 13,166
-------- --------
Gross profit 10,770 7,999
Operating expenses:
Selling 3,889 2,630
General and administrative 3,426 3,027
Research and development 1,129 724
-------- --------
Total operating expenses 8,444 6,381
-------- --------
Income before interest expense,
other income and income taxes 2,326 1,618
Interest expense 434 382
Other income (23) (7)
-------- --------
Income before income taxes 1,915 1,243
Income taxes 646 473
-------- --------
Net income $ 1,269 $ 770
======== ========
Earnings per common share:
Basic $ 0.14 $ 0.09
======== ========
Diluted $ 0.13 $ 0.09
======== ========
</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>
Three Months Ended
October 31,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,269 $ 770
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities:
Depreciation and amortization 928 503
Amortization of debt issuance costs 118 155
Deferred income taxes (27) -
Changes in assets and liabilities:
Accounts receivable 1,971 1,987
Inventories (351) 76
Prepaid expenses and other current assets 553 (32)
Accounts payable and accrued expenses (1,137) (4,663)
Income taxes payable (1,197) (2,235)
-------- --------
Net cash provided by (used in) operating activities 2,127 (3,439)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (256) (130)
Acquisition of Minntech, net of cash acquired - (25,923)
Cash used in discontinued operations (20) (34)
Other, net 148 (45)
-------- --------
Net cash used in investing activities (128) (26,132)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings for Minntech acquisition, net of debt
issuance costs - 32,625
Repayments under term loan facility (500) -
Net repayments under revolving credit facilities (1,000) -
Proceeds from exercises of stock options 242 160
-------- --------
Net cash (used in) provided by financing activities (1,258) 32,785
-------- --------
Increase in cash and cash equivalents 741 3,214
Cash and cash equivalents at beginning of period 12,565 5,050
-------- --------
Cash and cash equivalents at end of period $ 13,306 $ 8,264
======== ========
</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, 2002, and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere herein.
Cantel had three wholly-owned operating subsidiaries at October 31, 2002.
Minntech Corporation ("Minntech"), which was acquired in September 2001,
designs, develops, manufactures, markets and distributes
disinfection/sterilization reprocessing systems, sterilants and other supplies
for renal dialysis, as well as filtration and separation and other products for
medical and non-medical applications. MediVators, Inc. ("MediVators") designs,
develops, manufactures, markets and distributes endoscope reprocessing products.
MediVators was consolidated into Minntech's existing facilities in September
2002 and was legally merged into Minntech in November 2002. Minntech and
MediVators are sometimes collectively referred to as the "United States
subsidiaries." Carsen Group Inc. ("Carsen" or "Canadian subsidiary") is engaged
in the marketing, distribution and service of endoscopy and surgical, endoscope
reprocessing and scientific products in Canada.
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, 2002 was derived from
the audited consolidated balance sheet of the Company at that date.
In May 2002, 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
4
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Statements, and Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Certain items in the October 31, 2001 financial statements have been
reclassified from statements previously presented to conform to the presentation
of the October 31, 2002 financial statements. These reclassifications relate to
the operating segment classification of product service sales and cost of sales.
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 $78,061,000 (as
adjusted for fractional shares, and included cash of $41,396,000, shares of
Cantel common stock with a fair market value of $28,144,000, Cantel's existing
investment in Minntech of $725,000 and final transaction costs, including
severence obligations, of approximately $7,796,000). The transaction was
accounted for as a purchase and in accordance with the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 141, "BUSINESS COMBINATIONS"
("SFAS 141"). Minntech is reflected in the Company's results of operations for
the three months ended October 31, 2002, and for the portion of the three months
ended October 31, 2001 subsequent to its acquisition on September 7, 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 7 to the condensed consolidated financial statements.
Certain of the assumed liabilities are subjective in nature. These
liabilities have been reflected based upon the most recent information
available, and principally include certain state sales and use tax and state
income tax exposures and income tax liabilities related to the Company's foreign
subsidiaries. The ultimate settlement of such liabilities may be for amounts
which are different from the amounts presently recorded.
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Selected unaudited pro forma consolidated statements of income data
assuming that Minntech was included in the Company's results of operations as of
the beginning of the three month period ended October 31, 2001 is as follows:
<Table>
<Caption>
Three Months Ended
October 31,
---------------------------
2002 2001
------------ ------------
Net sales $ 28,373,000 $ 28,990,000
Net income 1,269,000 339,000
Earnings per share:
Basic $ 0.14 $ 0.04
Diluted $ 0.13 $ 0.03
Weighted average common shares:
Basic 9,243,000 9,051,000
Diluted 9,830,000 9,827,000
</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 the period
ended October 31, 2001, 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 results of Technimed had an insignificant
impact upon the Company's results of operations for the three months ended
October 31, 2002.
Technimed was a private company based in Montreal, Canada servicing medical
equipment, including rigid endoscopes and hand-held surgical instrumentation.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENT
In June 2002, the Financial Accounting Standards Board ("FASB")
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issued SFAS No. 146, "ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OF DISPOSAL
ACTIVITIES" ("SFAS 146"). This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "LIABILITY RECOGNITION FOR
CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY
(INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING)." Under SFAS 146 companies
recognize a cost associated with an exit or disposal activity when a liability
has been incurred, while under EITF Issue No. 94-3 companies recognized costs
once management implemented a plan to exit an activity. SFAS 146 also introduces
discounting the liability associated with the exit or disposal activity for the
time between the cost being incurred and when the liability is ultimately
settled. The Company will adopt the provisions of SFAS 146 if any exit or
disposal activities are initiated in the future.
In August 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS" ("SFAS 144"), which establishes
financial accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121 "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" ("SFAS 121"). SFAS 144
addresses the accounting for a segment of a business accounted for as a
discontinued operation which was not previously addressed by SFAS 121. In
addition, SFAS 144 resolves significant implementation issues related to SFAS
121. The provisions of SFAS 144 are effective for fiscal years beginning after
December 15, 2001. The Company adopted SFAS 144 on August 1, 2002. The adoption
of SFAS 144 had no impact on the Company's financial reporting and related
disclosures.
NOTE 4. COMPREHENSIVE INCOME
The Company's comprehensive income for the three months ended October 31,
2002 and 2001 is set forth in the following table:
<Table>
<Caption>
Three Months Ended
October 31,
-------------------------
2002 2001
----------- ----------
Net income $ 1,269,000 $ 770,000
Other comprehensive income (loss):
Unrealized loss on currency hedging (77,000) (1,000)
Unrealized loss on interest rate cap (19,000) -
Foreign currency translation 401,000 (494,000)
----------- ----------
Comprehensive income $ 1,574,000 $ 275,000
=========== ==========
</Table>
NOTE 5. FINANCIAL INSTRUMENTS
The Company accounts for derivative instruments and hedging activities in
accordance with SFAS No. 133, as amended, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES" ("SFAS 133"). SFAS 133 requires the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
designated as hedges must be adjusted to fair value through earnings. If the
derivative is designated as a hedge, depending on the nature of the hedge,
changes in the fair value of the derivative will either be offset against the
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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 $5,750,000 (United States dollars) at October 31, 2002 and cover a
portion of Carsen's projected purchases of inventories through April 2003.
In addition, changes in the value of the euro against the United States
dollar affect the Company's results of operations because a portion of the net
assets of Minntech's Netherlands subsidiary are denominated and ultimately
settled in United States dollars but must be converted into its functional euro
currency. In order to hedge against the impact of fluctuations in the value of
the euro relative to the United States dollar, the Company enters into
short-term contracts to purchase euros forward. There was one such foreign
currency forward contract amounting to EURO 6,000,000 at October 31, 2002 which
covers certain assets and liabilities of Minntech's Netherlands subsidiary which
are denominated in currencies other than its functional currency. Such contract
expires on December 31, 2002. Under its credit facilities, such contracts to
purchase euros may not exceed $12,000,000 in an aggregate notional amount at any
time.
In accordance with SFAS 133, all of the Company's foreign currency forward
contracts are designated as hedges. Recognition of gains and losses related to
the Canadian hedges is deferred within other comprehensive income until
settlement of the underlying commitments, and realized gains and losses are
recorded within cost of sales upon settlement. Gains and losses related to the
hedging contracts to buy euros forward is immediately realized within general
and administrative expenses due to the short-term nature of such contracts. The
Company does not hold any derivative financial instruments for speculative or
trading purposes.
The Company entered into new credit facilities in September 2001, as more
fully described in note 7 to the condensed consolidated financial statements,
for which the interest rate on outstanding borrowings is variable. In order to
protect its interest rate exposure, the Company entered into a three-year
interest rate cap agreement expiring on September 7, 2004 which caps the London
Interbank Offered Rate ("LIBOR") at 4.50% on $12,500,000 of the Company's
borrowings. The cost of the interest rate cap, which is included in other
assets, was $246,500 and is being amortized to interest expense over the
three-year life of the agreement. The difference between its amortized cost and
its fair value is recorded as an unrealized loss and is included in other
comprehensive income.
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NOTE 6. INTANGIBLES AND GOODWILL
In June 2001, the FASB 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). The Company adopted SFAS 142 on August
1, 2001, which was the beginning of fiscal 2002.
The Company's intangible assets which continue to be subject to
amortization consist primarily of technology, customer lists, non-compete
agreements and patents. These intangible assets are being amortized on the
straight-line method over the estimated useful lives of the assets ranging from
2-20 years. The Company's intangible assets that have indefinite useful lives
and therefore are not amortized consist of trademarks and tradenames.
At the time of the Minntech acquisition a goodwill benchmark impairment
study was performed. On August 1, 2002, such goodwill was reviewed for
impairment by an independent appraiser using the methods prescribed in SFAS 142.
Based upon such review, the Company concluded that there was no impairment of
the goodwill.
NOTE 7. 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. lenders (the "Term Loan Facility") used
by Cantel to finance a portion of the Minntech acquisition, (ii) a $17,500,000
senior secured revolving credit facility from the U.S. lenders (the "U.S.
Revolving Credit Facility") used by Cantel to finance a portion of the Minntech
acquisition as well as being available for future working capital requirements
for the U.S. businesses of Cantel, including Minntech 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") available 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") expires 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 LIBOR, depending upon the Company's
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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 4.25% and 4.50%, respectively, at December 6, 2002, and the
LIBOR rates ranged from 1.40% to 2.05% at December 6, 2002. The margins
applicable to the Company's outstanding borrowings at December 6, 2002 are 1.50%
above the lender's base rate and 2.75% above LIBOR. In order to protect its
interest rate exposure, the Company entered into a three-year interest rate cap
agreement expiring on September 7, 2004 covering $12,500,000 of borrowings under
the Term Loan Facility, which caps LIBOR on this portion of outstanding
borrowings at 4.50%. The Credit Facilities also provide for fees on the unused
portion of such facilities at rates ranging from .30% to .50%, depending upon
the Company's consolidated ratio of debt to EBITDA.
The 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 October 31, 2002, the Company had
$27,000,000 outstanding under its Credit Facilities, including $23,000,000 under
the Term Loan Facility. Subsequent to October 31, 2002, the Company repaid an
additional $500,000 under its Credit Facilities; therefore, at December 6, 2002,
the Company had $26,500,000 outstanding under its Credit Facilities including
$23,000,000 under the Term Loan Facility. Amounts repaid by the Company under
the Term Loan Facility may not be re-borrowed.
Aggregate annual required maturities of the Credit Facilities over the next
five years and thereafter are as follows:
<Table>
Nine month period ending July 31, 2003 $ 2,250,000
Fiscal 2004 4,500,000
Fiscal 2005 6,500,000
Fiscal 2006 7,750,000
Fiscal 2007 6,000,000
Thereafter -
------------
Total $ 27,000,000
============
</Table>
The amount maturing in fiscal 2007 includes all of the amounts outstanding
under the revolving credit facilities ($4,000,000 at October 31, 2002) as such
amounts are required to be repaid prior to
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the expiration date of such facilities.
NOTE 8. 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.
The following table sets forth the computation of basic and diluted
earnings per common share:
<Table>
<Caption>
Three Months Ended
October 31,
-------------------------
2002 2001
----------- ----------
Numerator for basic and diluted
earnings per common share:
Net income $ 1,269,000 $ 770,000
=========== ==========
Denominator for basic and diluted
earnings per common share:
Denominator for basic earnings
per common share - weighted
average number of shares
outstanding 9,243,462 8,164,194
Dilutive effect of common stock
equivalents using the treasury
stock method and the average
market price for the period 586,927 775,973
----------- ----------
Denominator for diluted earnings
per common share - weighted
average number of shares
outstanding and common
stock equivalents 9,830,389 8,940,167
=========== ==========
Basic earnings per common share $ 0.14 $ 0.09
=========== ==========
Diluted earnings per common share $ 0.13 $ 0.09
=========== ==========
</Table>
NOTE 9. INCOME TAXES
The consolidated effective tax rate on operations was 33.7% and 38.1% for
the three months ended October 31, 2002 and 2001, respectively. In conjunction
with the purchase accounting for the
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acquisition of Minntech, Cantel eliminated 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 has provided in its results of operations income tax expense for its
United States operations at the statutory tax rate; however, actual payment of
U.S. Federal income taxes will reflect the benefits of the utilization of the
NOLs.
The Company's results of operations for the three months ended October 31,
2002 also reflect income tax expense for its international subsidiaries at their
respective statutory rates. Such international subsidiaries include the
Company's subsidiaries in Canada, the Netherlands and Japan, which had effective
tax rates during the three months ended October 31, 2002 of approximately 37.5%,
28.1% and 45.0%, respectively. For the three months ended October 31, 2001,
income taxes are principally comprised of taxes imposed on the Company's
Canadian subsidiary, as well as Minntech's Netherlands subsidiary since the date
of the acquisition, each at their respective statutory income tax rates. The
lower overall effective tax rate for the three months ended October 31, 2002, as
compared to the three months ended October 31, 2001, is principally due to the
geographic mix of pretax income, as well as a reduction in the Canadian
statutory tax rate.
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 Minntech,
MediVators and Carsen.
Reference is made to (i) the impact on the Company's results of operations
of a weaker Canadian dollar against the United States dollar during the three
months ended October 31, 2002, compared with the three months ended October 31,
2001 (decrease in value of approximately 1% for the three months ended October
31, 2002, as compared to the three months ended October 31, 2001, based upon
average exchange rates), (ii) critical accounting policies of the Company, as
more fully described elsewhere in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, (iii) 3,143,000 additional shares
issued in connection with a three-for-two stock split effected in the form of a
50% stock dividend paid to stockholders in May 2002, as more fully described in
note 1 to the Condensed Consolidated Financial Statements, and (iv) the
Company's acquisition of Minntech in September 2001, as more fully described in
notes 2 and 7 to the condensed consolidated financial statements.
Minntech is reflected in the Company's results of operations for the three
months ended October 31, 2002 and for the portion of the three months ended
October 31, 2001 subsequent to its acquisition on September 7, 2001. The
acquisition of Minntech has added two new operating segments to the Company,
Dialysis Products and Filtration and Separation Products. Additionally, Minntech
also contributes to the Company's Product Service operating segment. Discussion
herein of the
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Company's pre-existing businesses 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, 2002 (the "2002 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:
<Table>
<Caption>
Three Months Ended
October 31,
--------------------------------
2002 2001
---------------- --------------
(Dollar amounts in thousands)
$ % $ %
-------- ----- -------- -----
Dialysis Products $ 14,353 50.6 $ 9,456 44.7
Endoscopy and Surgical Products 3,318 11.7 3,030 14.3
Endoscope Reprocessing Products 3,596 12.7 3,062 14.5
Filtration and Separation Products 3,337 11.7 2,294 10.8
Scientific Products 1,990 7.0 1,713 8.1
Product Service 1,865 6.6 1,833 8.7
Elimination of intercompany sales of
Endoscope Reprocessing Products (86) (0.3) (223) (1.1)
-------- ----- -------- -----
$ 28,373 100.0 $ 21,165 100.0
======== ===== ======== =====
</Table>
Net sales increased by $7,208,000, or 34.1%, to $28,373,000 for the three
months ended October 31, 2002, from $21,165,000 for the three months ended
October 31, 2001. Net sales contributed by Minntech for the three months ended
October 31, 2002 and 2001 were $18,520,000 and $12,277,000, respectively;
without the Minntech acquisition, net sales of the Company's pre-existing
businesses would have increased by $965,000, or 10.9%, to $9,853,000 for the
three months ended October 31, 2002, from $8,888,000 for the three months ended
October 31, 2001.
The increase in sales of the Company's pre-existing businesses for the
three months ended October 31, 2002 was principally attributable to endoscope
reprocessing products, endoscopy and surgical products and scientific products.
The increase in sales of endoscope reprocessing
13
<Page>
products was primarily due to an increase in demand in the United States. The
increase in sales of endoscopy and surgical products was primarily due to
demand; despite this increase in demand, endoscopy and surgical products
continue to be adversely impacted by healthcare funding issues in Canada as well
as intensified competition. Healthcare funding in Canada is dependent upon
governmental appropriations and the Company cannot ascertain what impact the
funding situation will have on future sales of Carsen. The increase in sales of
scientific products was primarily due to an increase in demand for microscopes
and related imaging products.
Gross profit increased by $2,771,000, or 34.6%, to $10,770,000 for the
three months ended October 31, 2002, from $7,999,000 for the three months ended
October 31, 2001. Gross profit contributed by Minntech for the three months
ended October 31, 2002 and 2001 was $7,286,000 and $4,689,000, respectively.
Without the Minntech acquisition, gross profit of the Company's pre-existing
businesses would have increased by $174,000, or 5.2%, to $3,484,000 for the
three months ended October 31, 2002, from $3,310,000 for the three months ended
October 31, 2001.
Gross profit as a percentage of sales for the three months ended
October 31, 2002 and 2001 was 38.0% and 37.8%, respectively. During the three
months ended October 31, 2001, Minntech's gross profit was adversely impacted by
a $438,000 charge to cost of sales related to the sale of inventories which
carried a step-up in value recorded as part of the purchase accounting; such
charge reduced gross profit percentage by 2.1% for the three months ended
October 31, 2001. Minntech's gross profit as a percentage of sales was 39.3% and
38.2% for the three months ended October 31, 2002 and 2001, respectively.
Without the impact of the Minntech acquisition, gross profit as a percentage of
sales for the three months ended October 31, 2002 and 2001 would have been 35.4%
and 37.2%, respectively.
The lower gross profit percentage from the Company's pre-existing
businesses for the three months ended October 31, 2002, as compared with the
three months ended October 31, 2001, was primarily attributable to an increase
in fixed costs and sales mix associated with Carsen's product service business;
an increase in the cost structure associated with manufacturing MediVators'
DSD-201 endoscope reprocessing units; sales mix associated with endoscope
reprocessing; non-recurring unabsorbed manufacturing overhead associated with
MediVators' relocation into Minntech's facilities; and 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.
Selling expenses as a percentage of net sales were 13.7% for the three
months ended October 31, 2002, compared with 12.4% for the three months ended
October 31, 2001. For the three months ended October 31, 2002, the increase in
selling expenses as a percentage of net sales was primarily attributable to the
inclusion of the higher selling cost structure related to the Minntech
operations for the entire quarter ended October 31, 2002, as compared to a
partial quarter (since the date of the acquisition) for the three months ended
October 31, 2001, as well as an increase in personnel and expanded marketing
efforts at Minntech
14
<Page>
to support worldwide sales.
General and administrative expenses increased by $399,000 to $3,426,000 for
the three months ended October 31, 2002, from $3,027,000 for the three months
ended October 31, 2001, principally due to the inclusion of the Minntech
operations for the entire quarter ended October 31, 2002, as compared to a
partial quarter (since the date of the acquisition) for the three months ended
October 31, 2001; an increase in the cost of commercial insurance; and foreign
exchange losses associated with translating foreign denominated assets into
functional currencies, partially offset by a reduction in incentive
compensation.
Research and development expenses increased by $405,000 to $1,129,000 for
the three months ended October 31, 2002, from $724,000 for the three months
ended October 31, 2001, principally due to the inclusion of the Minntech
operations for the entire quarter ended October 31, 2002, as compared to a
partial quarter (since the date of the acquisition) for the three months ended
October 31, 2001. All of the Company's research and development activities
relate to the Minntech and MediVators operations.
Interest expense was $434,000 for the three months ended October 31, 2002,
compared with $382,000 for the three months ended October 31, 2001. This
increase in interest expense was attributable to outstanding borrowings under
the Company's credit facilities for the entire quarter ended October 31, 2002,
as compared to a partial quarter (since the date of the acquisition) for the
three months ended October 31, 2001. Partially offsetting this increase were
lower average outstanding borrowings and lower interest rates during the three
months ended October 31, 2002. Additionally, during the three months ended
October 31, 2001 there was a one-time write-off of fees in connection with the
prior credit facility.
Income before income taxes increased by $672,000 to $1,915,000 for the
three months ended October 31, 2002, from $1,243,000 for the three months ended
October 31, 2001.
The consolidated effective tax rate on operations was 33.7% and 38.1% for
the three months ended October 31, 2002 and 2001, respectively. In conjunction
with the purchase accounting for the acquisition of Minntech, Cantel eliminated
the valuation allowances previously existing against its deferred tax assets
related to the net operating loss carryforwards ("NOLs") accumulated in the
United States. Therefore, for all periods subsequent to September 7, 2001, the
Company has provided in its results of operations income tax expense for its
United States operations at the statutory tax rate; however, actual payment of
U.S. Federal income taxes will reflect the benefits of the utilization of the
NOLs.
The Company's results of operations for the three months ended October 31,
2002 also reflect income tax expense for its international subsidiaries at their
respective statutory rates. Such international subsidiaries include the
Company's subsidiaries in Canada, the Netherlands and Japan, which had effective
tax rates during the three
15
<Page>
months ended October 31, 2002 of approximately 37.5%, 28.1% and 45.0%,
respectively. For the three months ended October 31, 2001, income taxes are
principally comprised of taxes imposed on the Company's Canadian subsidiary, as
well as Minntech's Netherlands subsidiary since the date of the acquisition,
each at their respective statutory income tax rates. The lower overall effective
tax rate for the three months ended October 31, 2002, as compared to the three
months ended October 31, 2001, is principally due to the geographic mix of
pretax income, as well as a reduction in the Canadian statutory tax rate.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2002, the Company's working capital was $38,635,000,
compared with $37,824,000 at July 31, 2002. This increase in working capital
primarily reflects an increase in cash and cash equivalents and decreases in
compensation payable and income taxes payable, partially offset by a decrease in
accounts receivable.
Net cash provided by operating activities was $2,127,000 for the three
months ended October 31, 2002 compared with net cash used in operating
activities of $3,439,000 for the three months ended October 31, 2001. For the
three months ended October 31, 2002, the net cash provided by operating
activities was primarily due to net income, after adjusting for depreciation and
amortization, and a decrease in accounts receivable, partially offset by
decreases in accounts payable and accrued expenses and income taxes payable. For
the three months ended October 31, 2001, the net cash used in operating
activities was primarily due to decreases in accounts payable and accrued
expenses and income taxes payable, partially offset by net income, after
adjusting for depreciation and amortization, and a decrease in accounts
receivable.
Net cash used in investing activities was $128,000 and $26,132,000 for the
three months ended October 31, 2002 and 2001, respectively. For the three months
ended October 31, 2002, the net cash used in investing activities was primarily
due to capital expenditures. For the three months ended October 31, 2001, the
net cash used in investing activities was primarily for the acquisition of
Minntech.
Net cash used in financing activities was $1,258,000 for the three months
ended October 31, 2002, compared with net cash provided by financing activities
of $32,785,000 for the three months ended October 31, 2001. For the three months
ended October 31, 2002, the net cash used in financing activities was primarily
attributable to repayments under the Company's credit facilities. For the three
months ended October 31, 2001, the net cash provided by financing activities was
primarily attributable to borrowings under the Company's 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
16
<Page>
include (i) a $25,000,000 senior secured amortizing term loan facility from a
consortium of U.S. lenders (the "Term Loan Facility") used by Cantel to finance
a portion of the Minntech acquisition, (ii) a $17,500,000 senior secured
revolving credit facility from the U.S. lenders (the "U.S. Revolving Credit
Facility") used by Cantel to finance a portion of the Minntech acquisition as
well as being available for future working capital requirements for the U.S.
businesses of Cantel, including Minntech 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") available 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") expires 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 4.25% and 4.50%, respectively, at
December 6, 2002, and the LIBOR rates ranged from 1.40% to 2.05% at December 6,
2002. The margins applicable to the Company's outstanding borrowings at December
6, 2002 are 1.50% above the lender's base rate and 2.75% above LIBOR. In order
to protect its interest rate exposure, the Company entered into a three-year
interest rate cap agreement expiring on September 7, 2004 covering $12,500,000
of borrowings under the Term Loan Facility, which caps LIBOR on this portion of
outstanding borrowings at 4.50%. The Credit Facilities also provide for fees on
the unused portion of such facilities at rates ranging from .30% to .50%,
depending upon the Company's consolidated ratio of debt to EBITDA.
The 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 October 31, 2002, the Company had
$27,000,000 outstanding under its Credit Facilities, including $23,000,000 under
the Term Loan Facility. Subsequent to October 31, 2002, the Company repaid an
additional $500,000 under its Credit Facilities; therefore, at December 6, 2002,
17
<Page>
the Company had $26,500,000 outstanding under its Credit Facilities including
$23,000,000 under the Term Loan Facility. Amounts repaid by the Company under
the Term Loan Facility may not be re-borrowed.
Aggregate annual required maturities of the Credit Facilities over the next
five years and thereafter are as follows:
<Table>
Nine month period ending July 31, 2003 $ 2,250,000
Fiscal 2004 4,500,000
Fiscal 2005 6,500,000
Fiscal 2006 7,750,000
Fiscal 2007 6,000,000
Thereafter -
------------
Total $ 27,000,000
============
</Table>
The amount maturing in fiscal 2007 includes all of the amounts outstanding
under the revolving credit facilities ($4,000,000 at October 31, 2002) as such
amounts are required to be repaid prior to the expiration date of such
facilities.
Aggregate future minimum commitments at October 31, 2002 under operating
leases for property and equipment are as follows:
<Table>
Nine month period ending July 31, 2003 $ 871,000
Fiscal 2004 960,000
Fiscal 2005 553,000
Fiscal 2006 125,000
Fiscal 2007 21,000
-----------
Total rental commitments $ 2,530,000
===========
</Table>
The Company has determined that it will repatriate minimal amounts of
existing and future accumulated profits from its international locations until
existing domestic NOLs are exhausted, which the Company has determined to be
approximately through fiscal 2004. Notwithstanding this strategy, the Company
believes that its current cash position, anticipated cash flows from operations,
(including its U.S. operations) and the funds available under its revolving
credit facilities will be sufficient to satisfy the Company's cash operating
requirements for the foreseeable future based upon its existing operations,
including the payment of remaining liabilities from the Minntech acquisition. At
December 6, 2002, approximately $14,212,000 was available under the revolving
credit facilities.
During the three months ended October 31, 2002, compared with the three
months ended October 31, 2001, the average value of the Canadian dollar
decreased by approximately 1% relative to the value of the United States dollar.
Changes in the value of the Canadian dollar against the United States dollar
affect the Company's results of operations because the Company's Canadian
subsidiary purchases substantially all of its products in United States dollars
and sells its products in Canadian dollars. 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.
18
<Page>
Under the Canadian Revolving Credit Facility, Carsen has a $20,000,000
(United States dollars) foreign currency hedging facility which is available to
hedge against the impact of such currency fluctuations on purchases of
inventories. Total commitments for foreign currency forward contracts under this
facility amounted to $3,609,000 (United States dollars) at December 6, 2002 and
cover a portion of the Canadian subsidiary's projected purchases of inventories
through April 2003. The weighted average exchange rate of the forward contracts
open at December 6, 2002 was $1.5629 Canadian dollar per United States dollar,
or $.6398 United States dollar per Canadian dollar. The exchange rate published
by the Wall Street Journal on December 6, 2002 was $1.5613 Canadian dollar per
United States dollar, or $.6405 United States dollar per Canadian dollar.
During the three months ended October 31, 2002, the value of the euro
increased by approximately 1% relative to the value of the United States dollar.
Changes in the value of the euro against the United States dollar affect the
Company's results of operations because a portion of the net assets of
Minntech's Netherlands subsidiary are denominated and ultimately settled in
United States dollars but must be converted into its functional euro currency.
During the three months ended October 31, 2002, such strengthening of the euro
relative to the United States dollar had an adverse impact upon the Company's
results of operations. Such currency fluctuations also result in a change in the
United States dollar value of the Company's assets that are denominated in
euros.
In order to hedge against the impact of fluctuations in the value of the
euro relative to the United States dollar, the Company enters into short-term
contracts to purchase euros forward. There was one foreign currency forward
contract amounting to EURO 6,000,000 at December 6, 2002 which covers certain
assets and liabilities of Minntech's Netherlands subsidiary which are
denominated in currencies other than its functional currency. Such contract
expires on December 31, 2002. Under its Credit Facilities, such contracts to
purchase euros may not exceed $12,000,0000 in an aggregate notional amount at
any time.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
133, as amended, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"
("SFAS 133"), all of the Company's foreign currency forward contracts are
designated as hedges. Recognition of gains and losses related to the Canadian
hedges is deferred within other comprehensive income until settlement of the
underlying commitments, and realized gains and losses are recorded within cost
of sales upon settlement. Gains and losses related to the hedging contracts to
buy euros forward is immediately realized within general and administrative
expenses due to the short-term nature of such contracts.
For purposes of translating the balance sheet, at October 31, 2002 compared
to July 31, 2002, the value of the Canadian dollar and the value of the euro
increased by approximately 2% and 1%, respectively, compared to the value of the
United States dollar, thereby causing a decrease in the negative cumulative
foreign currency translation adjustment during such period. The total of these
currency movements was an overall decrease in the negative cumulative foreign
currency
19
<Page>
translation adjustment during the three months ended October 31, 2002 of
$401,000, thereby increasing stockholders' equity.
Changes in the value of the Japanese yen relative to the United States
dollar during the three months ended October 31, 2002 did not have a significant
impact upon either the Company's results of operations or the translation of the
balance sheet, primarily due to the fact that the Company's Japanese subsidiary
accounts for a relatively small portion of consolidated net sales, earnings and
net assets.
Inflation has not significantly impacted the Company's operations.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's condensed consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis,
the Company continually evaluates its estimates. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
condensed consolidated financial statements.
REVENUE RECOGNITION
Revenue on product sales is recognized as products are shipped to customers
or when title passes, net of provisions for sales allowances and similar items.
Domestic sales of endoscope reprocessing equipment are recognized on a bill and
hold basis based upon the receipt of a written purchase order, the completion
date specified in the order, the actual completion of the manufacturing process
and the invoicing of goods. Revenue on service sales is recognized when repairs
are completed and the products are shipped to customers.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable consist of amounts due to the Company from normal
business activities. Allowances for doubtful accounts are reserves for the
estimated loss from the inability of customers to make required payments. The
Company uses historical experience as well as current market information in
determining the estimate. If the financial condition of the Company's customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
20
<Page>
INVENTORIES
Inventories consist of products which are sold in the ordinary course of
the Company's business and are stated at the lower of cost (first-in, first-out)
or market. In assessing the value of inventories, the Company must make
estimates and judgments regarding reserves required for product obsolescence,
aging of inventories and other issues potentially affecting the saleable
condition of products. In performing such evaluations, the Company uses
historical experience as well as current market information.
DEFERRED TAX ASSETS AND LIABILITIES
The Company recognizes deferred tax assets and liabilities based on the
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities. Deferred tax assets and liabilities also include
items recorded in conjunction with the purchase accounting for business
acquisitions. The Company regularly reviews its deferred tax assets for
recoverability and establishes a valuation allowance based on historical taxable
income, projected future taxable income, and the expected timing of the
reversals of existing temporary differences. Although realization is not
assured, management believes it is more likely than not that the recorded
deferred tax assets will be realized. Additionally, deferred tax liabilities are
regularly reviewed to confirm that the amounts recorded are appropriately
stated. All of such evaluations require significant management judgments.
LONG-LIVED ASSETS
Certain of the Company's identifiable intangible assets, such as current
technology and customer base, are amortized on the straight-line method over
their estimated useful lives. Additionally, the Company has recorded goodwill
and trademarks and tradenames, all of which have indefinite useful lives and are
therefore not amortized. These assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable, and goodwill is reviewed for impairment at least
annually in accordance with SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE
ASSETS."
BUSINESS COMBINATIONS
During fiscal 2002, the Company's acquisition of Minntech required
significant estimates and judgments related to the fair value of assets acquired
and liabilities assumed. Certain of the liabilities are subjective in nature.
These liabilities have been reflected in the purchase accounting based upon the
most recent information available, and principally include certain state sales
and use tax and state income tax exposures, as well as income tax liabilities
related to the Company's foreign subsidiaries. The ultimate settlement of such
liabilities may be for amounts which are different from the amounts presently
recorded.
21
<Page>
OTHER MATTERS
The Company does not have any off balance sheet financial arrangements.
FORWARD LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements. All forward-looking statements
involve risks and uncertainties, including, without limitation, acceptance and
demand of new products, the impact of competitive products and pricing, the
Company's ability to successfully integrate and operate acquired and merged
businesses and the risks associated with such businesses, and the risks detailed
in the Company's filings and reports with the Securities and Exchange
Commission. Such statements are only predictions, and actual events or results
may differ materially from those projected.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign currency market risk: A portion of the Company's products are
imported from the Far East and Western Europe, the Company's United States
subsidiaries sell a portion of their products outside of the United States, and
Minntech's Netherlands subsidiary sells a portion of its products outside of the
European Union. Consequently, the Company's business could be materially and
adversely affected by the imposition of trade barriers, fluctuations in the
rates of exchange of various currencies, tariff increases and import and export
restrictions, affecting the United States, Canada and the Netherlands.
Carsen imports a substantial portion of its products from the United States
and pays for such products in United States dollars, 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
2002 Form 10-K. Fluctuations in the rates of currency exchange between the
United States and Canada had an adverse impact for the three months ended
October 31, 2002, compared with the three months ended October 31, 2001, upon
the Company's results of operations, and had a positive impact upon
stockholders' equity, as described in Management Discussion and Analysis of
Financial Condition and Results of Operations.
In order to hedge against the impact of such currency fluctuations on the
purchases of inventories, Carsen enters into foreign currency forward contracts
on firm purchases of such inventories in United States dollars. Total
commitments for such foreign currency forward contracts amounted to $5,750,000
(United States dollars) at October 31, 2002 and cover a portion of Carsen's
projected purchases of inventories through April 2003.
22
<Page>
Changes in the value of the euro against the United States dollar affect
the Company's results of operations because a portion of the net assets of
Minntech's Netherlands subsidiary are denominated and ultimately settled in
United States dollars but must be converted into its functional euro currency.
Additionally, financial statements of the Netherlands subsidiary are translated
using the accounting policies described in Note 2 to the Consolidated Financial
Statements included within the Company's 2002 Form 10-K. Fluctuations in the
rates of currency exchange between the European Union and the United States had
an adverse impact for the three months ended October 31, 2002, compared with the
three months ended October 31, 2001, upon the Company's results of operations,
and had a positive impact upon stockholders' equity, as described in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
In order to hedge against the impact of fluctuations in the value of the
euro relative to the United States dollar, the Company enters into short-term
contracts to purchase euros forward. There was one such foreign currency forward
contract amounting to EURO 6,000,000 at October 31, 2002 which covers certain
assets and liabilities of Minntech's Netherlands subsidiary which are
denominated in currencies other than its functional currency. Such contract
expires on December 31, 2002. Under its credit facilities, such contracts to
purchase euros may not exceed $12,000,000 in an aggregate notional amount at any
time.
The functional currency of Minntech's Japan subsidiary is the Japanese yen.
Changes in the value of the Japanese yen relative to the United States dollar
during the three months ended October 31, 2002 did not have a significant impact
upon either the Company's results of operations or the translation of the
balance sheet, primarily due to the fact that the Company's Japanese subsidiary
accounts for a relatively small portion of consolidated net sales, earnings and
net assets.
Interest rate market risk: The Company has two credit facilities for which
the interest rate on outstanding borrowings is variable. Therefore, interest
expense is principally affected by the general level of interest rates in the
United States and Canada. During the three months ended October 31, 2002 and
2001, all of the Company's outstanding borrowings were under its United States
credit facilities. In order to protect its interest rate exposure, the Company
has entered into a three-year interest rate cap expiring on September 7, 2004
covering $12,500,000 of borrowings under the Term Loan Facility, which caps
LIBOR on this portion of outstanding borrowings at 4.50%. At October 31, 2002,
the fair value of such interest rate cap is $12,000.
ITEM 4. CONTROLS AND PROCEDURES.
The Company maintains disclosure controls and procedures designed to ensure
that information required to be disclosed in the Company's Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified by the SEC and that such information is accumulated and communicated
to the Company's management, including its Chief Executive Officer and Chief
Financial Officer, as
23
<Page>
appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, the Company's
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives and the Company's management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
Within 90 days preceding the filing date of this report, the Company
performed an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures as defined in Exchange Act Rule 13a-14 and
15d-14. The evaluation was performed under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective in ensuring that material
information relating to the Company (including its consolidated subsidiaries)
was made known to them by others within the Company's consolidated group during
the period in which this report was being prepared and that the information
required to be included in the report has been recorded, processed, summarized
and reported on a timely basis.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date the Company completed its evaluation.
24
<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 October 31, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10(a) - Employment Agreement, dated as of November 14, 2002,
between the Registrant and Seth R. Segel.
10(b) - Stock Option Agreement, dated as of November 14, 2002,
between the Registrant and Seth R. Segel.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
October 31, 2002.
25
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CANTEL MEDICAL CORP.
Date: December 6, 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,
Senior Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
26
<Page>
CERTIFICATIONS
I, James P. Reilly, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cantel Medical Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 6, 2002
By: /s/ James P. Reilly
-------------------------------
James P. Reilly, President and Chief
Executive Officer (Principal Executive
Officer)
27
<Page>
CERTIFICATIONS
I, Craig A. Sheldon, Senior Vice President and Chief Financial Officer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Cantel Medical Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 6, 2002
By: /s/ Craig A. Sheldon
------------------------------------
Craig A. Sheldon, Senior Vice President and
Chief Financial Officer (Principal Financial and
Accounting Officer)
28