<Page>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
/X/ Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended January 31, 2003.
or
/ / Transition Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _____ to _____.
Commission file number: 0-6132
CANTEL MEDICAL CORP.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 22-1760285
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
150 Clove Road, Little Falls, New Jersey 07424
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code
(973) 890-7220
--------------
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes /X/ No
Number of shares of Common Stock outstanding as of March 5, 2003: 9,267,754.
<Page>
PART I - FINANCIAL INFORMATION
CANTEL MEDICAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands, Except Share Data)
(Unaudited)
<Table>
<Caption>
January 31, July 31,
2003 2002
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 12,831 $ 12,565
Accounts receivable, net 25,094 23,054
Inventories:
Raw materials 5,865 6,661
Work-in-process 2,156 1,581
Finished goods 8,809 9,089
----------- ----------
Total inventories 16,830 17,331
----------- ----------
Deferred income taxes 3,677 3,670
Prepaid expenses and other current assets 1,367 1,518
----------- ----------
Total current assets 59,799 58,138
Property and equipment, net 22,317 22,984
Intangible assets, net 7,417 7,788
Goodwill 16,383 16,376
Other assets 2,433 2,528
----------- ----------
$ 108,349 $ 107,814
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,500 $ 2,750
Accounts payable 7,396 6,288
Compensation payable 1,045 2,722
Other accrued expenses 5,999 6,347
Income taxes payable 818 2,207
----------- ----------
Total current liabilities 18,758 20,314
Long-term debt 21,750 25,750
Deferred income taxes 2,659 2,058
Other long-term liabilities 1,683 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; January 31 - 9,537,181 shares issued and
9,267,066 shares outstanding; July 31 - 9,491,118
shares issued and 9,221,003 shares outstanding 954 949
Additional capital 48,991 48,740
Retained earnings 15,278 11,629
Accumulated other comprehensive loss (532) (2,215)
Treasury Stock, at cost; January 31 and
July 31 - 270,115 shares (1,192) (1,192)
----------- ----------
Total stockholders' equity 63,499 57,911
----------- ----------
$ 108,349 $ 107,814
=========== ==========
</Table>
See accompanying notes.
1
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CANTEL MEDICAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
<Table>
<Caption>
Three Months Ended Six Months Ended
January 31, January 31,
2003 2002 2003 2002
-------- -------- -------- --------
Net sales:
Product sales $ 31,974 $ 30,734 $ 58,482 $ 50,066
Product service 2,453 2,166 4,318 3,999
-------- -------- -------- --------
Total net sales 34,427 32,900 62,800 54,065
-------- -------- -------- --------
Cost of sales:
Product sales 20,391 18,933 36,752 30,931
Product service 1,492 1,326 2,734 2,494
-------- -------- -------- --------
Total cost of sales 21,883 20,259 39,486 33,425
-------- -------- -------- --------
Gross profit 12,544 12,641 23,314 20,640
Operating expenses:
Selling 4,367 3,774 8,256 6,404
General and administrative 2,871 3,826 6,297 6,853
Research and development 1,141 942 2,270 1,666
-------- -------- -------- --------
Total operating expenses 8,379 8,542 16,823 14,923
-------- -------- -------- --------
Income before interest expense,
other income and income taxes 4,165 4,099 6,491 5,717
Interest expense 369 749 803 1,131
Other income (17) (36) (40) (43)
-------- -------- -------- --------
Income before income taxes 3,813 3,386 5,728 4,629
Income taxes 1,433 1,293 2,079 1,766
-------- -------- -------- --------
Net income $ 2,380 $ 2,093 $ 3,649 $ 2,863
======== ======== ======== ========
Earnings per common share:
Basic $ 0.26 $ 0.23 $ 0.39 $ 0.33
======== ======== ======== ========
Diluted $ 0.24 $ 0.21 $ 0.37 $ 0.30
======== ======== ======== ========
</Table>
See accompanying notes.
2
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CANTEL MEDICAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
(Unaudited)
<Table>
<Caption>
Six Months Ended
January 31,
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,649 $ 2,863
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 1,827 1,500
Amortization of debt issuance costs 227 268
Deferred income taxes 596 (188)
Changes in assets and liabilities:
Accounts receivable (1,442) 1,061
Inventories 883 946
Prepaid expenses and other current assets 165 191
Accounts payable and accrued expenses (1,381) (2,437)
Income taxes payable (1,423) (2,092)
-------- --------
Net cash provided by operating activities 3,101 2,112
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (488) (549)
Acquisition of Minntech, net of cash acquired - (29,964)
Acquisition of Technimed - (279)
Cash used in discontinued operations (19) (41)
Other, net (56) 44
-------- --------
Net cash used in investing activities (563) (30,789)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings for Minntech acquisition, net of debt
issuance costs - 33,870
Repayments under term loan facility (1,250) (500)
Net repayments under revolving credit facilities (2,000) (1,275)
Proceeds from exercises of stock options 256 172
-------- --------
Net cash (used in) provided by financing activities (2,994) 32,267
-------- --------
Effect of exchange rate changes on cash and
cash equivalents 722 (120)
-------- --------
Increase in cash and cash equivalents 266 3,470
Cash and cash equivalents at beginning of period 12,565 5,050
-------- --------
Cash and cash equivalents at end of period $ 12,831 $ 8,520
======== ========
</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 (the "2002 Form 10-K"), and Management's Discussion and Analysis
of Financial Condition and Results of Operations included elsewhere herein.
Cantel had two wholly-owned operating subsidiaries at January 31, 2003.
Minntech Corporation ("Minntech" or "United States subsidiary"), which was
acquired in September 2001, designs, develops, manufactures, markets,
distributes and services disinfection/sterilization reprocessing systems,
sterilants and other supplies for renal dialysis, filtration and separation and
other products for medical and non-medical applications and endoscope
reprocessing products. The Company's MediVators, Inc. ("MediVators") subsidiary,
which accounted for the majority of the endoscope reprocessing business, was
consolidated into Minntech's existing facilities in September 2002 and was
legally merged into Minntech in November 2002. 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 Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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Certain items in the January 31, 2002 financial statements have been
reclassified from statements previously presented to conform to the presentation
of the January 31, 2003 financial statements. These reclassifications relate to
the operating segment classifications of certain sales and related 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
severance 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 and six months ended January 31, 2003, the three months ended January
31, 2002, and the portion of the six months ended January 31, 2002 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 8 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. During the three months
ended January 31, 2003, the Company reached a favorable state sales tax
settlement in the amount of $542,000; such amount has been reflected as a
reduction of general and administrative expenses in the accompanying Condensed
Consolidated Statements of Income and has been included in the dialysis
operating segment.
5
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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 six month period ended January 31, 2002 is as follows:
<Table>
<Caption>
Six Months Ended
January 31,
---------------------------
2003 2002
------------ ------------
Net sales $ 62,800,000 $ 61,890,000
Net income 3,649,000 2,432,000
Earnings per share:
Basic $ 0.39 $ 0.27
Diluted $ 0.37 $ 0.25
Weighted average common shares:
Basic 9,254,000 9,068,000
Diluted 9,834,000 9,848,000
</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 six
month period ended January 31, 2002, 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
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 and six months
ended January 31, 2003 and 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 PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE" ("SFAS 148"). SFAS 148 amends SFAS No. 123, "STOCK-BASED
COMPENSATION" ("SFAS 123"), to provide alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosure in both annual and
interim financial statements about the effects on reported net income of an
entity's method of accounting for stock-based employee compensation. The
disclosure provisions of SFAS 148
6
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are effective for financial reports containing condensed financial statements
for interim periods beginning after December 15, 2002. The Company will adopt
the interim period disclosure provisions in its April 30, 2003 Form 10-Q.
In November 2002, the FASB issued Interpretation No. 45, "GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS" ("FIN 45"). FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of the
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002 and the disclosure requirements in this
interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company adopted FIN 45 on January 1,
2003. The adoption of FIN 45 had no significant impact on the Company's
financial position or results of operations. Disclosure requirements of FIN 45
are included in note 7 to the condensed consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR 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.
7
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NOTE 4. COMPREHENSIVE INCOME
The Company's comprehensive income for the three and six months ended
January 31, 2003 and 2002 is set forth in the following table:
<Table>
<Caption>
Three Months Ended Six Months Ended
January 31, January 31,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income $ 2,380,000 $ 2,093,000 $ 3,649,000 $ 2,863,000
Other comprehensive income (loss):
Unrealized loss on
currency hedging (189,000) (106,000) (266,000) (107,000)
Unrealized gain (loss) on
interest rate cap 12,000 (44,000) (7,000) (44,000)
Foreign currency translation 1,555,000 (338,000) 1,956,000 (832,000)
----------- ----------- ----------- -----------
Comprehensive income $ 3,758,000 $ 1,605,000 $ 5,332,000 $ 1,880,000
=========== =========== =========== ===========
</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
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 $11,750,000 (United States dollars) at January 31, 2003 and cover a
portion of Carsen's projected purchases of inventories through August 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 6,100,000 at January 31, 2003 which
covers certain assets and liabilities of Minntech's Netherlands subsidiary
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which are denominated in currencies other than its functional currency. Such
contract expired on February 28, 2003. 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 8 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 accumulated
other comprehensive loss.
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.
9
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NOTE 7. WARRANTY
The Company provides for estimated costs that may be incurred to remedy
deficiencies of quality or performance in the Company's products. Most of the
Company's products have a one-year warranty. The Company records provisions
for product warranties as a component of cost of sales in the Condensed
Consolidated Statements of Income based on an estimate of the amounts
necessary to settle existing and future claims on products sold. The
historical relationship of warranty costs to products sold is the primary
basis for the estimate. A significant increase in third party service repair
rates, the cost and availability of parts or the frequency of claims could
have a material adverse impact on the Company's results for the period or
periods in which such claims or additional costs materialize. Management
reviews its warranty exposure periodically and believes that the warranty
reserves are adequate; however, actual claims incurred could differ from
original estimates, requiring adjustments to the reserves.
A summary of activity in the warranty reserves follows:
<Table>
<Caption>
Three Months Ended Six Months Ended
January 31, January 31,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Beginning balance $ 345,000 $ 245,000 $ 401,000 $ 270,000
Provisions 654,000 126,000 764,000 196,000
Charges (503,000) (118,000) (669,000) (293,000)
Acquisition of Minntech - - - 80,000
---------- ---------- ---------- ----------
Ending balance $ 496,000 $ 253,000 $ 496,000 $ 253,000
========== ========== ========== ==========
</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. 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 (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
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ranging from 2.00% to 3.25% above 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 4.75%, respectively, at March 5, 2003, and the
LIBOR rates on outstanding borrowings ranged from 1.34% to 1.43% at March 5,
2003. The margins applicable to the Company's outstanding borrowings at March 5,
2003 are 1.25% above the lender's base rate and 2.50% 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 January 31, 2003, the Company had
$25,250,000 outstanding under its Credit Facilities, including $22,250,000 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>
Six month period ending July 31, 2003 $ 1,500,000
Fiscal 2004 4,500,000
Fiscal 2005 6,500,000
Fiscal 2006 7,750,000
Fiscal 2007 5,000,000
Thereafter -
------------
Total $ 25,250,000
============
</Table>
The amount maturing in fiscal 2007 includes all of the amounts outstanding
under the revolving credit facilities ($3,000,000 at January 31, 2003) as such
amounts are required to be repaid prior to the expiration date of such
facilities.
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NOTE 9. 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 Six Months Ended
January 31, January 31,
------------------------ ------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Numerator for basic and diluted
earnings per common share:
Net income $ 2,380,000 $ 2,093,000 $ 3,649,000 $ 2,863,000
=========== =========== =========== ===========
Denominator for basic and diluted
earnings per common share:
Denominator for basic earnings
per common share - weighted
average number of shares
outstanding 9,264,636 9,081,732 9,254,049 8,622,963
Dilutive effect of common stock
equivalents using the treasury
stock method and the average
market price for the period 572,180 785,588 579,985 780,234
----------- ----------- ----------- -----------
Denominator for diluted earnings
per common share - weighted
average number of shares
outstanding and common
stock equivalents 9,836,816 9,867,320 9,834,034 9,403,197
=========== =========== =========== ===========
Basic earnings per common share $ 0.26 $ 0.23 $ 0.39 $ 0.33
=========== =========== =========== ===========
Diluted earnings per common share $ 0.24 $ 0.21 $ 0.37 $ 0.30
=========== =========== =========== ===========
</Table>
NOTE 10. INCOME TAXES
The consolidated effective tax rate on operations was 36.3% and 38.2% for
the six months ended January 31, 2003 and 2002, 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 Federal net operating loss carryforwards ("NOLs") accumulated in the
United States.
12
<Page>
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 reflects the benefits of the utilization of the NOLs.
The Company's results of operations for the six months ended January 31,
2003 and 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 six months ended January 31, 2003 of approximately 37.5%,
22.8% and 45.0%, respectively. The lower overall effective tax rate for the six
months ended January 31, 2003, as compared to the six months ended January 31,
2002, is principally due to the geographic mix of pretax income, as well as a
reduction in the Canadian statutory tax rate.
NOTE 11. OPERATING SEGMENTS
In accordance with SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION", the Company has determined its reportable
business segments based upon an assessment of product types, organizational
structure, customers and internally prepared financial statements. The primary
factors used by management in analyzing segment performance are net sales and
operating income.
The operating segments follow the same accounting policies used for the
Company's condensed consolidated financial statements as described in note 2 to
the 2002 Form 10-K.
Operating segment information is summarized below:
<Table>
<Caption>
Three Months Ended Six Months Ended
January 31, January 31,
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales:
Dialysis $ 15,701,000 $ 15,471,000 $ 30,054,000 $ 24,926,000
Endoscopy and Surgical 4,430,000 5,258,000 7,478,000 7,964,000
Endoscope Reprocessing 5,629,000 3,861,000 9,410,000 7,025,000
Filtration and Separation 3,858,000 4,084,000 7,195,000 6,378,000
Scientific 2,356,000 2,060,000 4,345,000 3,773,000
Product Service 2,453,000 2,166,000 4,318,000 3,999,000
------------ ------------ ------------ ------------
Total $ 34,427,000 $ 32,900,000 62,800,000 $ 54,065,000
============ ============ ============ ============
Operating income:
Dialysis $ 2,099,000 $ 2,387,000 $ 3,762,000 $ 3,409,000
Endoscopy and Surgical 717,000 766,000 1,078,000 1,057,000
Endoscope Reprocessing 315,000 67,000 438,000 116,000
Filtration and Separation 901,000 1,011,000 1,377,000 1,641,000
Scientific 142,000 (53,000) 196,000 (109,000)
Product Service 676,000 453,000 1,005,000 788,000
------------ ------------ ------------ ------------
4,850,000 4,631,000 7,856,000 6,902,000
------------ ------------ ------------ ------------
General corporate expenses 685,000 532,000 1,365,000 1,185,000
Interest expense and other income 352,000 713,000 763,000 1,088,000
------------ ------------ ------------ ------------
Income before income taxes $ 3,813,000 $ 3,386,000 $ 5,728,000 $ 4,629,000
============ ============ ============ ============
</Table>
13
<Page>
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 and
Carsen.
Reference is made to (i) the impact on the Company's results of operations
of a stronger Canadian dollar against the United States dollar during the three
and six months ended January 31, 2003, compared with the three and six months
ended January 31, 2002 (increase in value of approximately 1.6% and 0.5% for the
three and six months ended January 31, 2003, respectively, as compared to the
three and six months ended January 31, 2002, based upon average exchange rates),
(ii) the impact on the Company's results of operations of a stronger euro
against the United States dollar during the three and six months ended January
31, 2003, compared with the three and six months ended January 31, 2002
(increase in value of approximately 15.7% and 11.9% for the three and six months
ended January 31, 2003, respectively, as compared to the three and six months
ended January 31, 2002, based upon average exchange rates), (iii) 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, (iv) 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 (v) 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
and six months ended January 31, 2003, the three months ended January 31, 2002,
and the portion of the six months ended January 31, 2002 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 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").
14
<Page>
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 Six Months Ended
January 31, January 31,
--------------------------------- ---------------------------------
2003 2002 2003 2002
---------------- --------------- ---------------- ---------------
(Dollar amounts in thousands) (Dollar amounts in thousands)
$ % $ % $ % $ %
-------- ----- -------- ----- -------- ----- -------- -----
Dialysis $ 15,701 45.6 $ 15,471 47.0 $ 30,054 47.8 $ 24,926 46.1
Endoscopy and Surgical 4,430 12.9 5,258 16.0 7,478 11.9 7,964 14.7
Endoscope Reprocessing 5,629 16.4 3,861 11.7 9,410 15.0 7,025 13.0
Filtration and Separation 3,858 11.2 4,084 12.4 7,195 11.5 6,378 11.8
Scientific 2,356 6.8 2,060 6.3 4,345 6.9 3,773 7.0
Product Service 2,453 7.1 2,166 6.6 4,318 6.9 3,999 7.4
-------- ----- -------- ----- -------- ----- -------- -----
$ 34,427 100.0 $ 32,900 100.0 $ 62,800 100.0 $ 54,065 100.0
======== ===== ======== ===== ======== ===== ======== =====
</Table>
Net sales increased by $1,527,000, or 4.6%, to $34,427,000 for the three
months ended January 31, 2003, from $32,900,000 for the three months ended
January 31, 2002.
Net sales increased by $8,735,000, or 16.2%, to $62,800,000 for the six
months ended January 31, 2003, from $54,065,000 for the six months ended January
31, 2002. Net sales contributed by Minntech (excluding the MediVators business)
for the six months ended January 31, 2003 and 2002 were $38,810,000 and
$32,425,000, respectively; without the Minntech acquisition, net sales of the
Company's pre-existing businesses would have increased by $2,350,000, or 10.9%,
to $23,990,000 for the six months ended January 31, 2003, from $21,640,000 for
the six months ended January 31, 2002.
The increase in sales for the three and six months ended January 31, 2003
was principally attributable to the Company's pre-existing businesses and
included an increase in sales of endoscope reprocessing products and scientific
products, partially offset by a decrease in sales of endoscopy and surgical
products. The increase in sales of endoscope reprocessing products was primarily
due to an increase in demand in the United States. The increase in sales of
scientific products was primarily due to an increase in demand for industrial
products. 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.
Although Canada recently adopted a budget that provides for a significant
increase in funding for diagnostic healthcare products, the Company cannot
ascertain what impact the funding situation or the new budget will have on
future sales of Carsen.
Gross profit decreased by $97,000, or 0.8%, to $12,544,000 for the three
months ended January 31, 2003, from $12,641,000 for the three months ended
January 31, 2002.
Gross profit increased by $2,674,000, or 13.0%, to $23,314,000 for
15
<Page>
the six months ended January 31, 2003, from $20,640,000 for the six months ended
January 31, 2002. Gross profit contributed by Minntech (excluding the MediVators
business) for the six months ended January 31, 2003 and 2002 was $15,414,000 and
$12,830,000, respectively. Without the Minntech acquisition, gross profit of the
Company's pre-existing businesses would have increased by $90,000, or 1.2%, to
$7,900,000 for the six months ended January 31, 2003, from $7,810,000 for the
six months ended January 31, 2002.
Gross profit as a percentage of sales for the three months ended January
31, 2003 and 2002 was 36.4% and 38.4%, respectively. During the three months
ended January 31, 2003, gross profit of the Company's pre-existing businesses
was adversely impacted by $905,000 in charges for warranty and slow moving
inventory related to the Company's endoscope reprocessing products. The warranty
charges were due to failures in certain parts associated with endoscope
reprocessing equipment, which failures have since been remedied by the Company.
Such charges reduced gross profit percentage by 2.7% for the three months ended
January 31, 2003.
Gross profit as a percentage of sales for the six months ended January
31, 2003 and 2002 was 37.1% and 38.2%, respectively. During the six months
ended January 31, 2003, gross profit of the Company's pre-existing businesses
was adversely impacted by $1,002,000 in charges for warranty and slow moving
inventory related to the Company's endoscope reprocessing products. Such
charges reduced gross profit percentage by 1.6% for the six months ended
January 31, 2003. Minntech's gross profit as a percentage of sales was 39.7%
and 39.6% for the six months ended January 31, 2003 and 2002, respectively.
Without the impact of the Minntech acquisition, gross profit as a percentage
of sales for the six months ended January 31, 2003 and 2002 would have been
32.9% and 36.1%, respectively.
The lower gross profit percentage from the Company's pre-existing
businesses for the three and six months ended January 31, 2003, as compared with
the three and six months ended January 31, 2002, was primarily attributable to
the charges for warranty and slow moving inventory related to the Company's
endoscope reprocessing products; an increase in fixed costs and sales mix
associated with Carsen's product service business; sales mix as well as an
increase in the manufacturing cost structure associated with endoscope
reprocessing; and non-recurring unabsorbed manufacturing overhead associated
with MediVators' relocation into Minntech's facilities. Additionally, for the
three months ended January 31, 2003, the lower gross profit percentage for the
Company was also attributable to sales mix associated with dialysis.
Selling expenses as a percentage of net sales were 12.7% and 13.1% for the
three and six months ended January 31, 2003, compared with 11.5% and 11.8% for
the three and six months ended January 31, 2002. For the three and six months
ended January 31, 2003, the increase in selling expenses as a percentage of net
sales was primarily attributable to an increase in personnel and expanded
marketing efforts at Minntech to support worldwide sales. For the six months
ended January 31, 2003, the increase in selling expenses as a percentage of net
sales was also attributable to the inclusion of the higher selling cost
structure
16
<Page>
related to the Minntech operations for the entire six months ended January 31,
2003, as compared to a partial period (since the date of the acquisition) for
the six months ended January 31, 2002.
General and administrative expenses decreased by $955,000 to $2,871,000
for the three months ended January 31, 2003, from $3,826,000 for the three
months ended January 31, 2002. For the six months ended January 31, 2003,
general and administrative expenses decreased by $556,000 to $6,297,000, from
$6,853,000 for the six months ended January 31, 2002. For the three and six
months ended January 31, 2003, as compared with the three and six months
ended January 31, 2002, the decreases in general and administrative expenses
are principally due to a $542,000 sales tax settlement paid to the Company; a
decrease in bad debt expense; and a reduction in incentive compensation.
Partially offsetting these decreases were the inclusion of the Minntech
operations for the entire six months ended January 31, 2003, as compared to a
partial period (since the date of the acquisition) for the six months ended
January 31, 2002; an increase in the cost of commercial insurance; and
foreign exchange losses associated with translating certain foreign
denominated assets into functional currencies.
Research and development expenses (which include continuing engineering
costs) increased by $199,000 to $1,141,000 for the three months ended January
31, 2003, from $942,000 for the three months ended January 31, 2002. For the six
months ended January 31, 2003, research and development expenses increased by
$604,000 to $2,270,000, from $1,666,000 for the six months ended January 31,
2002. For the three and six months ended January 31, 2003, the increase in
research and development expenses was related to expanded activities in
Minntech's (including MediVators) dialysis, filtration and separation, and
endoscope reprocessing areas. For the six months ended January 31, 2003, the
increase in research and development expenses was also attributable to the
inclusion of the Minntech operations for the entire six months ended January 31,
2003, as compared to a partial period (since the date of the acquisition) for
the six months ended January 31, 2002.
Interest expense was $369,000 for the three months ended January 31, 2003,
compared with $749,000 for the three months ended January 31, 2002. For the six
months ended January 31, 2003 interest expense was $803,000, compared with
$1,131,000 for the six months ended January 31, 2002. These decreases in
interest expense were attributable to lower average outstanding borrowings and
lower interest rates during the three and six months ended January 31, 2003.
Additionally, during the six months ended January 31, 2002 there was a one-time
write-off of fees in connection with the prior credit facility. Partially
offsetting these decreases were outstanding borrowings under the Company's
credit facilities for the entire six months ended January 31, 2003, as compared
to a partial period (since the date of the acquisition) for the six months ended
January 31, 2002.
Income before income taxes increased by $1,099,000 to $5,728,000 for the
six months ended January 31, 2003, from $4,629,000 for the six
17
<Page>
months ended January 31, 2002.
The consolidated effective tax rate on operations was 36.3% and 38.2% for
the six months ended January 31, 2003 and 2002, 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 Federal 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 reflects the benefits of the utilization of the NOLs.
The Company's results of operations for the six months ended January 31,
2003 and 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 six months ended January 31, 2003 of approximately 37.5%,
22.8% and 45.0%, respectively. The lower overall effective tax rate for the six
months ended January 31, 2003, as compared to the six months ended January 31,
2002, 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 January 31, 2003, the Company's working capital was $41,041,000,
compared with $37,824,000 at July 31, 2002. This increase in working capital
primarily reflects an increase in accounts receivable and decreases in
compensation payable and income taxes payable.
Net cash provided by operating activities was $3,101,000 and $2,112,000 for
the six months ended January 31, 2003 and 2002, respectively. For the six months
ended January 31, 2003, 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 an increase in accounts
receivable and decreases in accounts payable and accrued expenses and income
taxes payable. For the six months ended January 31, 2002, the net cash provided
by operating activities was primarily due to net income, after adjusting for
depreciation and amortization, and decreases in accounts receivable and
inventories, partially offset by decreases in accounts payable and accrued
expenses and income taxes payable.
Net cash used in investing activities was $563,000 and $30,789,000 for the
six months ended January 31, 2003 and 2002, respectively. For the six months
ended January 31, 2003, the net cash used in investing activities was primarily
due to capital expenditures. For the six months ended January 31, 2002, the net
cash used in investing activities was primarily for the acquisition of Minntech.
Net cash used in financing activities was $2,994,000 for the six months
ended January 31, 2003, compared with net cash provided by financing activities
of $32,267,000 for the six months ended January 31,
18
<Page>
2002. For the six months ended January 31, 2003, the net cash used in financing
activities was primarily attributable to repayments under the Company's credit
facilities. For the six months ended January 31, 2002, 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 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 (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 4.75%, respectively, at
March 5, 2003, and the LIBOR rates on outstanding borrowings ranged from 1.34%
to 1.43% at March 5, 2003. The margins applicable to the Company's outstanding
borrowings at March 5, 2003 are 1.25% above the lender's base rate and 2.50%
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
19
<Page>
the stock of Minntech and MediVators owned by Cantel and 65% of the outstanding
shares of Carsen stock owned by Cantel); and are guaranteed by Minntech and
MediVators. The Canadian Revolving Credit Facility provides for available
borrowings based upon percentages of the Canadian Borrower's eligible accounts
receivable and inventories; requires the Canadian Borrower to meet certain
financial covenants; and is secured by substantially all assets of the Canadian
Borrower.
On September 7, 2001, the Company borrowed $25,000,000 under the Term Loan
Facility and $9,000,000 under the U.S. Revolving Credit Facility in connection
with the acquisition of Minntech. At January 31, 2003, the Company had
$25,250,000 outstanding under its Credit Facilities, including $22,250,000 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>
Six month period ending July 31, 2003 $ 1,500,000
Fiscal 2004 4,500,000
Fiscal 2005 6,500,000
Fiscal 2006 7,750,000
Fiscal 2007 5,000,000
Thereafter -
------------
Total $ 25,250,000
============
</Table>
The amount maturing in fiscal 2007 includes all of the amounts outstanding
under the revolving credit facilities ($3,000,000 at January 31, 2003) as such
amounts are required to be repaid prior to the expiration date of such
facilities.
Aggregate future minimum commitments at January 31, 2003 under operating
leases for property and equipment are as follows:
<Table>
Six month period ending July 31, 2003 $ 601,000
Fiscal 2004 1,061,000
Fiscal 2005 625,000
Fiscal 2006 130,000
Fiscal 2007 22,000
Thereafter -
-----------
Total rental commitments $ 2,439,000
===========
</Table>
The majority of Carsen's sales of endoscopy and surgical products and
scientific products related to microscopy have been made pursuant to a
distribution agreement (the "Olympus Agreement") with Olympus America Inc.
("Olympus"), and the majority of Carsen's sales of scientific products related
to industrial technology equipment have been made pursuant to a distribution
agreement with Olympus Industrial America Inc. (the "Olympus Industrial
Agreement"), under which Carsen has been granted the exclusive right to
distribute the covered Olympus products in Canada. Both agreements expire on
March 31, 2004. In addition, MediVators has a distribution agreement with
Olympus (the "MediVators Agreement") expiring on August 1, 2003 that grants
Olympus the exclusive right to distribute the majority of the Company's
20
<Page>
endoscope reprocessing products and related accessories and supplies in the
United States and Puerto Rico. Carsen is subject to minimum purchase
requirements under the Olympus Agreement, and Olympus is subject to minimum
purchase projections under the MediVators Agreement. If Carsen fulfills its
obligations under the Olympus Agreement, the parties will establish new minimum
purchase requirements and extend the Olympus Agreement through March 31, 2006.
The Company is currently negotiating the renewal of the MediVators Agreement. In
the event that the MediVators Agreement is not renewed, the Company would have
to locate a new distributor or establish its own distribution system in the
United States and Puerto Rico for the Company's endoscope reprocessing products
and related accessories and supplies.
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 estimates to be no
earlier than fiscal 2005. 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
March 5, 2003, approximately $13,315,000 was available under the revolving
credit facilities.
During the three and six months ended January 31, 2003, compared with the
three and six months ended January 31, 2002, the average value of the Canadian
dollar increased by approximately 1.6% and .5%, respectively, 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.
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 $12,790,000 (United States dollars) at March 5, 2003 and
cover a portion of the Canadian subsidiary's projected purchases of inventories
through November 2003. The weighted average exchange rate of the forward
contracts open at March 5, 2003 was $1.5501 Canadian dollar per United States
dollar, or $.6451 United States dollar per Canadian dollar. The exchange rate
published by the Wall Street Journal on March 5, 2003 was $1.4789 Canadian
dollar per United States dollar, or $.6762 United States dollar per Canadian
dollar.
21
<Page>
During the three and six months ended January 31, 2003, the value of the
euro increased by approximately 15.7% and 11.9%, respectively, 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 and six months ended January 31,
2003, 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 7,500,000 at March 5, 2003 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 March 31, 2003. 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 January 31, 2003 compared
to July 31, 2002, the value of the Canadian dollar and the value of the euro
increased by approximately 4.0% and 10.8%, respectively, compared to the value
of the United States dollar, thereby causing a decrease in the accumulated
foreign currency translation loss during such period. The total of these
currency movements was an overall decrease in the accumulated foreign currency
translation loss during the six months ended January 31, 2003 of $1,956,000,
thereby increasing stockholders' equity.
Changes in the value of the Japanese yen relative to the United States
dollar during the three and six months ended January 31, 2003 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.
22
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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. If installation is required on products shipped, then revenue
is not recognized until completion of the installation. 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.
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.
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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."
WARRANTIES
The Company records provisions for potential warranty claims based on
management's assessment of prior warranty cost experience and current market
information. Estimates of warranty costs are recorded at the time revenue is
recognized. However, actual costs could be higher or lower than amounts
originally estimated due to the fact that the dollar amounts and number of
warranty claims are subject to variation as a result of many factors that cannot
be predicted with certainty.
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.
OTHER MATTERS
The Company does not have any off balance sheet financial arrangements.
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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
subsidiary sells a portion of its 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 a positive impact for the three and six months
ended January 31, 2003, compared with the three and six months ended January 31,
2002, 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 $11,750,000
(United States dollars) at January 31, 2003 and cover a portion of Carsen's
projected purchases of inventories through August 2003.
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
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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 and six
months ended January 31, 2003, compared with the three and six months ended
January 31, 2002, 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 6,100,000 at January 31, 2003 which covers certain
assets and liabilities of Minntech's Netherlands subsidiary which are
denominated in currencies other than its functional currency. Such contract
expired on February 28, 2003. 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 and six months ended January 31, 2003 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 and six months ended January 31, 2003
and 2002, 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 January 31, 2003,
the fair value of such interest rate cap is $4,000.
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 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
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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.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 19, 2002, the Company held its Annual Meeting of
Stockholders for the fiscal year ended July 31, 2002 to re-elect
James P. Reilly, Robert L. Barbanell, Joseph M. Cohen and Fred L. Shapiro as
directors of the Company, to hold office until the Annual Meeting of
Stockholders to be held after the fiscal year ending July 31, 2005. 8,469,360
votes were cast for and 256,012 votes were against in the election of Messrs.
Barbanell, Cohen and Shapiro, and 8,469,357 votes were cast for and 256,015
votes were against in the election of Mr. Reilly.
Stockholders also approved an amendment to the Company's 1997 Employee
Stock Option Plan to increase the number of shares reserved for issuance and
available for grant thereunder from 1,500,000 to 2,000,000. 4,292,324 votes were
cast for, 1,543,785 votes were against, and 33,214 votes abstained in the
approval of the amendment to the Company's 1997 Employee Stock Option Plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 - Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 - Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
January 31, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CANTEL MEDICAL CORP.
Date: March 5, 2003
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)
29
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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: March 5, 2003
By: /s/ James P. Reilly
----------------------------------
James P. Reilly, President and Chief
Executive Officer (Principal Executive
Officer)
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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: March 5, 2003
By: /s/ Craig A. Sheldon
-------------------------------
Craig A. Sheldon, Senior Vice President and
Chief Financial Officer (Principal Financial and
Accounting Officer)
31