<Page>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
/ X / Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended April 30, 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 June 3, 2003: 9,284,036.
<Page>
PART I - FINANCIAL INFORMATION
CANTEL MEDICAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands, Except Share Data)
(Unaudited)
<Table>
<Caption>
April 30, July 31,
ASSETS 2003 2002
----------- ----------
Current assets:
Cash and cash equivalents $ 14,943 $12,565
Accounts receivable, net 22,623 23,054
Inventories:
Raw materials 5,853 6,661
Work-in-process 2,455 1,581
Finished goods 11,172 9,089
--------- ---------
Total inventories 19,480 17,331
--------- ---------
Deferred income taxes 3,732 3,670
Prepaid expenses and other current assets 1,131 1,518
--------- ---------
Total current assets 61,909 58,138
Property and equipment, net 22,053 22,984
Intangible assets, net 7,224 7,788
Goodwill 16,395 16,376
Other assets 2,504 2,528
--------- ---------
$110,085 $107,814
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,000 $ 2,750
Accounts payable 7,123 6,288
Compensation payable 1,767 2,722
Other accrued expenses 5,650 6,347
Income taxes payable 778 2,207
--------- ---------
Total current liabilities 19,318 20,314
Long-term debt 19,000 25,750
Deferred income taxes 3,089 2,058
Other long-term liabilities 1,676 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; April 30 - 9,552,497 shares issued and
9,281,412 shares outstanding; July 31 - 9,491,118
shares issued and 9,221,003 shares outstanding 955 949
Additional capital 49,045 48,740
Retained earnings 17,501 11,629
Accumulated other comprehensive income (loss) 705 (2,215)
Treasury Stock, at cost; April 30 - 271,085 shares;
July 31 - 270,115 shares (1,204) (1,192)
--------- ---------
Total stockholders' equity 67,002 57,911
--------- ---------
$110,085 $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 Nine Months Ended
April 30, April 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net sales:
Product sales $30,394 $30,946 $88,876 $81,012
Product service 2,454 2,250 6,772 6,249
-------- -------- -------- --------
Total net sales 32,848 33,196 95,648 87,261
-------- -------- -------- --------
Cost of sales:
Product sales 19,000 18,593 55,752 49,524
Product service 1,454 1,453 4,188 3,947
-------- -------- -------- --------
Total cost of sales 20,454 20,046 59,940 53,471
-------- -------- -------- --------
Gross profit 12,394 13,150 35,708 33,790
Operating expenses:
Selling 4,392 3,991 12,648 10,395
General and administrative 3,259 3,856 9,556 10,709
Research and development 914 1,073 3,184 2,739
-------- -------- -------- --------
Total operating expenses 8,565 8,920 25,388 23,843
-------- -------- -------- --------
Income before interest expense,
other income and income taxes 3,829 4,230 10,320 9,947
Interest expense 313 586 1,116 1,717
Other income (15) (26) (55) (69)
-------- -------- -------- --------
Income before income taxes 3,531 3,670 9,259 8,299
Income taxes 1,308 1,356 3,387 3,122
-------- -------- -------- --------
Net income $ 2,223 $ 2,314 $ 5,872 $ 5,177
======== ======== ======== ========
Earnings per common share:
Basic $ 0.24 $ 0.25 $ 0.63 $ 0.59
======== ======== ======== ========
Diluted $ 0.23 $ 0.23 $ 0.60 $ 0.54
======== ======== ======== ========
</Table>
See accompanying notes.
2
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CANTEL MEDICAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
(Unaudited)
<Table>
<Caption>
Nine Months Ended
April 30,
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $5,872 $5,177
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 2,720 2,563
Amortization of debt issuance costs 339 376
Deferred income taxes 972 111
Changes in assets and liabilities:
Accounts receivable 1,487 29
Inventories (1,215) 977
Prepaid expenses and other current assets (85) 19
Accounts payable and accrued expenses (1,304) (3,805)
Income taxes payable (1,484) (1,347)
-------- --------
Net cash provided by operating activities 7,302 4,100
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (813) (1,077)
Acquisition of Minntech, net of cash acquired - (28,846)
Acquisition of Technimed - (279)
Cash used in discontinued operations (19) (39)
Other, net (157) 183
-------- --------
Net cash used in investing activities (989) (30,058)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings for Minntech acquisition, net of debt
issuance costs - 34,070
Repayments under term loan facility (2,000) (1,000)
Net repayments under revolving credit facilities (3,500) (3,475)
Proceeds from exercises of stock options 299 306
-------- --------
Net cash (used in) provided by financing activities (5,201) 29,901
-------- --------
Effect of exchange rate changes on cash and
cash equivalents 1,266 (84)
-------- --------
Increase in cash and cash equivalents 2,378 3,859
Cash and cash equivalents at beginning of period 12,565 5,050
-------- --------
Cash and cash equivalents at end of period $14,943 $ 8,909
======== ========
</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.
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.
Cantel had two wholly-owned operating subsidiaries at April 30, 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
combined with 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.
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 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.
4
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Certain items in the April 30, 2002 financial statements have been
reclassified from statements previously presented to conform to the presentation
of the April 30, 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, based
upon the closing price of Cantel common stock on the date of the acquisition, 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 nine months ended April 30,
2003, the three months ended April 30, 2002, and the portion of the nine months
ended April 30, 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
at the time of the acquisition, 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 and April 30, 2003, the Company recorded
favorable state sales tax settlements in the amounts of $542,000 and $177,000,
respectively; such amounts have been reflected as a reduction of general and
administrative expenses in the accompanying Condensed Consolidated Statements of
Income and have 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 nine month period ended April 30, 2002 is as follows:
<Table>
<Caption>
Nine Months Ended
April 30,
------------------------
2003 2002
----------- -----------
Net sales $95,648,000 $95,086,000
Net income 5,872,000 4,746,000
Earnings per share:
Basic $0.63 $0.52
Diluted $0.60 $0.48
Weighted average common shares:
Basic 9,260,000 9,080,000
Diluted 9,834,000 9,884,000
</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
nine month period ended April 30, 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 nine months
ended April 30, 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 May 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS
OF BOTH LIABILITIES AND EQUITY" ("SFAS 150"). SFAS 150 establishes standards for
how a company classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS 150 is not expected to have a significant impact
on the Company's financial statements.
6
<Page>
In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT
133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS 149"). SFAS 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under FASB Statement No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES" ("SFAS 133"). SFAS 149 is effective for contracts entered into or
modified after June 30, 2003. The Company does not expect the adoption of SFAS
149 to have a significant impact on the Company's financial position or results
of operations.
In January 2003, the FASB issued Financial Interpretation No. 46,
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES" ("FIN 46"). FIN 46 requires that
if an entity has a controlling financial interest in a variable interest entity,
the assets, liabilities and results of activities of the variable interest
entity should be included in the consolidated financial statements of the
entity. FIN 46 requires that its provisions are effective immediately for all
arrangements entered into after January 31, 2003. For any arrangements entered
into prior to January 31, 2003, the FIN 46 provisions are required to be adopted
at the beginning of the first interim or annual period beginning after June 15,
2003. The Company adopted FIN 46 on February 1, 2003. The adoption on FIN 46 had
no impact on the Company's operating results or financial position as the
Company does not have any variable interest entities.
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 notes 7 and 8 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.
7
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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 and nine months ended
April 30, 2003 and 2002 is set forth in the following table:
<Table>
<Caption>
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income $2,223,000 $2,314,000 $5,872,000 $5,177,000
Other comprehensive income (loss):
Unrealized loss on
currency hedging (232,000) (138,000) (498,000) (245,000)
Unrealized gain (loss) on
interest rate cap 17,000 (26,000) 10,000 (70,000)
Foreign currency translation 1,452,000 591,000 3,408,000 (241,000)
----------- ----------- ----------- -----------
Comprehensive income $3,460,000 $2,741,000 $8,792,000 $4,621,000
=========== =========== =========== ===========
</Table>
NOTE 5. FINANCIAL INSTRUMENTS
---------------------
The Company accounts for derivative instruments and hedging activities
in accordance with SFAS 133, as amended. 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.
8
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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. These foreign currency forward contracts have been designated as
cash flow hedge instruments. Total commitments for such foreign currency forward
contracts amounted to $11,206,000 (United States dollars) at April 30, 2003 and
cover a portion of Carsen's projected purchases of inventories through December
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. These short-term contracts have
been designated as fair value hedge instruments. There was one such foreign
currency forward contract amounting to Euro 7,303,000 at April 30, 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 June 3, 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. This interest rate cap agreement has been designated as a
cash flow hedge instrument. 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 unamortized
cost and its fair value at April 30, 2003 is recorded as an unrealized loss and
is included in accumulated other comprehensive loss.
9
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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 using the methods prescribed in SFAS 142. Based upon such review, the
Company concluded that there was no impairment of the goodwill.
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.
10
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A summary of activity in the warranty reserves follows:
<Table>
<Caption>
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------ ------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Beginning balance $ 474,000 $ 240,000 $ 379,000 $ 257,000
Provisions 366,000 245,000 1,130,000 441,000
Charges (317,000) (180,000) (986,000) (473,000)
Foreign currency translation 3,000 - 3,000 -
Acquisition of Minntech - - - 80,000
----------- ----------- ----------- -----------
Ending balance $ 526,000 $ 305,000 $ 526,000 $ 305,000
=========== =========== =========== ===========
</Table>
The warranty provisions and charges during the three and nine months
ended April 30, 2003 and 2002 relate principally to the Company's endoscope
reprocessing products.
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 (Cantel and
Minntech are collectively referred to as 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 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 5.0%, respectively, at June 3, 2003, and the LIBOR rates on outstanding
borrowings ranged from 1.26% to 1.43% at June 3, 2003. The margins applicable to
the Company's outstanding borrowings at June 3, 2003 are 1.25% above the
lender's base rate and 2.50% above LIBOR. At June 3, 2003, all of the Company's
outstanding borrowings were using LIBOR rates. 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
11
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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 owned by Cantel and 65%
of the outstanding shares of Carsen stock owned by Cantel); and are guaranteed
by Minntech. As of April 30, 2003, the U.S. Borrowers were not in compliance
with one of the financial covenants under the Term Loan Facility and the U.S.
Revolving Credit Facility related to the Company's consolidated EBITDA during
the preceding twelve month period (actual calculation of $17,456,000 compared to
a required minimum EBITDA of $18,000,000); however, the U.S. lenders have
provided the Company with a waiver of this covenant violation.
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. As of April 30, 2003, the Canadian Borrower was in compliance with the
financial covenants under the Canadian Revolving Credit Facility.
On September 7, 2001, the Company borrowed $25,000,000 under the Term
Loan Facility and $9,000,000 under the U.S. Revolving Credit Facility in
connection with the acquisition of Minntech. At April 30, 2003, the Company had
$23,000,000 outstanding under its Credit Facilities, including $21,500,000 under
the Term Loan Facility. Subsequent to April 30, 2003, the Company repaid an
additional $500,000 under its Credit Facilities; therefore, at June 3, 2003, the
Company had $22,500,000 outstanding under its Credit Facilities including
$21,500,000 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>
Three month period ending July 31, 2003 $ 750,000
Fiscal 2004 4,500,000
Fiscal 2005 6,500,000
Fiscal 2006 7,750,000
Fiscal 2007 3,500,000
------------
Total $23,000,000
============
</Table>
The amount maturing in fiscal 2007 includes all of the amounts
outstanding under the revolving credit facilities ($1,500,000 at April 30, 2003)
as such amounts are required to be repaid prior to the expiration date of such
facilities.
12
<Page>
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 Nine Months Ended
April 30, April 30,
------------------------ ------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Numerator for basic and diluted
earnings per common share:
Net income $2,223,000 $2,314,000 $5,872,000 $5,177,000
=========== =========== =========== ===========
Denominator for basic and diluted
earnings per common share:
Denominator for basic earnings
per common share - weighted
average number of shares
outstanding 9,272,225 9,107,817 9,259,975 8,781,028
Dilutive effect of common stock
equivalents using the treasury
stock method and the average
market price for the period 562,710 855,063 574,295 804,425
----------- ----------- ----------- -----------
Denominator for diluted earnings
per common share - weighted
average number of shares
outstanding and common
stock equivalents 9,834,935 9,962,880 9,834,270 9,585,453
=========== =========== =========== ===========
Basic earnings per common share $0.24 $0.25 $0.63 $0.59
=========== =========== =========== ===========
Diluted earnings per common share $0.23 $0.23 $0.60 $0.54
=========== =========== =========== ===========
</Table>
NOTE 10. STOCK-BASED COMPENSATION
------------------------
In December 2002, the FASB issued SFAS No. 148, "ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE" ("SFAS 148"). SFAS 148
amends the disclosure requirements of SFAS No. 123, "STOCK-BASED COMPENSATION"
("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 are
13
<Page>
effective for financial reports containing condensed financial statements for
interim periods beginning after December 15, 2002.
In accordance with the provisions of SFAS 123, the Company has elected
to follow APB Opinion 25 and related interpretations in accounting for its stock
option plans and, accordingly, does not recognize compensation expense. If the
Company had elected to recognize compensation expense based on the fair value of
the options granted at grant date as prescribed by SFAS 123, net income and
diluted earning per share would have been as follows:
<Table>
<Caption>
Three Months Ended Nine Months Ended
April 30, April 30,
----------------------- -----------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income:
As reported $2,223,000 $2,314,000 $5,872,000 $5,177,000
Stock-based employee compen-
sation expense, net of
related tax effects (298,000) (401,000) (888,000) (1,054,000)
----------- ----------- ----------- -----------
Pro forma $1,925,000 $1,913,000 $4,984,000 $4,123,000
=========== =========== =========== ===========
Earnings per common share - Basic:
As reported $0.24 $0.25 $0.63 $0.59
Pro forma $0.21 $0.21 $0.54 $0.47
Earnings per common share - Diluted:
As reported $0.23 $0.23 $0.60 $0.54
Pro forma $0.20 $0.19 $0.51 $0.43
</Table>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option valuation model. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility and the expected life.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of the fair value of its employee stock options.
NOTE 11. INCOME TAXES
------------
The consolidated effective tax rate on operations was 36.6% and 37.6%
for the nine months ended April 30, 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. 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.
14
<Page>
The Company's results of operations for the nine months ended April 30,
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 nine months ended April 30, 2003 of approximately 37.5%,
23.3% and 45.0%, respectively. The lower overall effective tax rate for the nine
months ended April 30, 2003, as compared to the nine months ended April 30,
2002, is principally due to the geographic mix of pretax income, as well as a
reduction in the Canadian statutory tax rate.
NOTE 12. 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 Nine Months Ended
April 30, April 30,
------------------------- -------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales:
Dialysis $14,272,000 $14,777,000 $44,326,000 $39,703,000
Endoscopy and Surgical 4,392,000 4,516,000 11,870,000 12,480,000
Endoscope Reprocessing 4,994,000 5,276,000 14,404,000 12,301,000
Filtration and Separation 3,906,000 4,023,000 11,101,000 10,401,000
Scientific 2,830,000 2,354,000 7,175,000 6,127,000
Product Service 2,454,000 2,250,000 6,772,000 6,249,000
------------ ------------ ------------ ------------
Total $32,848,000 $33,196,000 $95,648,000 $87,261,000
============ ============ ============ ============
Operating income:
Dialysis $ 1,584,000 $ 1,758,000 $ 5,346,000 $ 5,167,000
Endoscopy and Surgical 667,000 585,000 1,745,000 1,642,000
Endoscope Reprocessing 610,000 1,043,000 1,048,000 1,159,000
Filtration and Separation 904,000 1,054,000 2,281,000 2,695,000
Scientific 357,000 108,000 553,000 (1,000)
Product Service 412,000 503,000 1,417,000 1,291,000
------------ ------------ ------------ ------------
4,534,000 5,051,000 12,390,000 11,953,000
------------ ------------ ------------ ------------
General corporate expenses 705,000 821,000 2,070,000 2,006,000
Interest expense and other income 298,000 560,000 1,061,000 1,648,000
------------ ------------ ------------ ------------
Income before income taxes $ 3,531,000 $ 3,670,000 $ 9,259,000 $ 8,299,000
============ ============ ============ ============
</Table>
15
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
- ---------------------
The results of operations reflect the results of Cantel and its
wholly-owned subsidiaries.
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 nine months ended April 30, 2003, compared with the three and nine
months ended April 30, 2002 (increase in value of approximately 7.8% and 2.9%
for the three and nine months ended April 30, 2003, respectively, as compared to
the three and nine months ended April 30, 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 nine months ended
April 30, 2003, compared with the three and nine months ended April 30, 2002
(increase in value of approximately 23.3% and 15.7% for the three and nine
months ended April 30, 2003, respectively, as compared to the three and nine
months ended April 30, 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, (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, and (vi) the merger of the Company's
MediVators, Inc. subsidiary into Minntech in November 2002, which subsidiary
accounted for the majority of the Company's endoscope reprocessing business.
Minntech is reflected in the Company's results of operations for the
three and nine months ended April 30, 2003, the three months ended April 30,
2002, and the portion of the nine months ended April 30, 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").
16
<Page>
The following table presents net sales and the percentage to the total
net sales for each operating segment of the Company:
<Table>
<Caption>
Three Months Ended Nine Months Ended
April 30, April 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
---------------- --------------- ---------------- ---------------
(Dollar amounts in thousands) (Dollar amounts in thousands)
$ % $ % $ % $ %
-------- ------ -------- ------ -------- ------ -------- ------
Dialysis $14,272 43.4 $14,777 44.5 $44,326 46.3 $39,703 45.5
Endoscopy and Surgical 4,392 13.4 4,516 13.6 11,870 12.4 12,480 14.3
Endoscope Reprocessing 4,994 15.2 5,276 15.9 14,404 15.1 12,301 14.1
Filtration and Separation 3,906 11.9 4,023 12.1 11,101 11.6 10,401 11.9
Scientific 2,830 8.6 2,354 7.1 7,175 7.5 6,127 7.0
Product Service 2,454 7.5 2,250 6.8 6,772 7.1 6,249 7.2
-------- ------ -------- ------ -------- ------ -------- ------
$32,848 100.0 $33,196 100.0 $95,648 100.0 $87,261 100.0
======== ====== ======== ====== ======== ====== ======== ======
</Table>
Net sales decreased by $348,000, or 1.0%, to $32,848,000 for the three
months ended April 30, 2003, from $33,196,000 for the three months ended April
30, 2002. The decrease in net sales was principally attributable to a decrease
in sales of dialysis products, endoscopy and surgical products and endoscope
reprocessing products, partially offset by an increase in scientific products.
The decrease in sales of dialysis products was primarily due to a decrease in
demand for the Company's Renatron (dialysis reprocessing equipment) product in
the United States and, during the three months ended April 30, 2002, significant
sales of Renatrons to a major dialysis chain. The decrease in sales of endoscopy
and surgical products was primarily due to the outbreak of severe acute
respiratory syndrome ("SARS") in the greater Toronto area which prevented the
Company's sales personnel from visiting hospitals. In addition, endoscopy and
surgical products continue to be adversely impacted by healthcare funding issues
in Canada as well as intensified competition. The decrease in sales of endoscope
reprocessing products was primarily due to a decrease in demand for the
Company's endoscope disinfection equipment. The increase in sales of scientific
products was primarily due to an increase in demand for scientific imaging
products.
Net sales increased by $8,387,000, or 9.6%, to $95,648,000 for the nine
months ended April 30, 2003, from $87,261,000 for the nine months ended April
30, 2002. Net sales contributed by Minntech (excluding the MediVators business)
for the nine months ended April 30, 2003 and 2002 were $57,493,000 and
$52,410,000, respectively. Net sales of the Company's pre-existing businesses
increased by $3,304,000, or 9.5%, to $38,155,000 for the nine months ended April
30, 2003, from $34,851,000 for the nine months ended April 30, 2002.
The increase in sales of the Company's pre-existing businesses for the
nine months ended April 30, 2003 was attributable to an increase in sales of
endoscope reprocessing products, scientific products and product service,
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 for endoscope disinfection equipment and
consumables. The increase in sales of scientific products was primarily due to
an increase in demand for scientific imaging and industrial products. The
increase in product service was primarily due to increased demand related to the
increased
17
<Page>
field population of the Company's endoscope disinfection equipment in the
marketplace. 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. Additionally, the sale of endoscopy and surgical
products has been adversely impacted by the outbreak of SARS in the greater
Toronto area which prevented the Company's sales personnel from visiting
hospitals.
Net sales were positively impacted for the three and nine months ended
April 30, 2003, compared with the three and nine months ended April 30, 2002, by
approximately $715,000 and $844,000, respectively, due to the translation of
Carsen's net sales using a stronger Canadian dollar against the United States
dollar. Carsen's net sales are principally included in the endoscopy and
surgical, scientific, and product service segments.
Gross profit decreased by $756,000, or 5.7%, to $12,394,000 for the
three months ended April 30, 2003, from $13,150,000 for the three months ended
April 30, 2002.
Gross profit increased by $1,918,000, or 5.7%, to $35,708,000 for the
nine months ended April 30, 2003, from $33,790,000 for the nine months ended
April 30, 2002. Gross profit contributed by Minntech (excluding the MediVators
business) for the nine months ended April 30, 2003 and 2002 was $22,738,000 and
$21,215,000, respectively. Gross profit of the Company's pre-existing businesses
increased by $395,000, or 3.1%, to $12,970,000 for the nine months ended April
30, 2003, from $12,575,000 for the nine months ended April 30, 2002.
Gross profit as a percentage of sales for the three months ended April
30, 2003 and 2002 was 37.7% and 39.6%, respectively. For the three months ended
April 30, 2003, the lower gross profit percentage for the Company was primarily
attributable to sales mix associated with dialysis products; charges for
warranty related to the Company's endoscope reprocessing products; and an
increase in the cost to manufacture the current models of the Company's
endoscope reprocessing equipment.
Gross profit as a percentage of sales for the nine months ended April
30, 2003 and 2002 was 37.3% and 38.7%, respectively. During the nine months
ended April 30, 2003, gross profit of the Company's pre-existing businesses was
adversely impacted by $1,359,000 in charges for warranty and slow moving
inventory related to the Company's endoscope reprocessing products. Such charges
reduced gross profit percentage by 1.4% for the nine months ended April 30,
2003. Minntech's gross profit as a percentage of sales was 39.5% and 40.5% for
the nine months ended April 30, 2003 and 2002, respectively. Gross profit as a
percentage of sales of the Company's pre-existing businesses for the nine months
ended April 30, 2003 and 2002 would have been 34.0% and 36.1%, respectively.
The lower gross profit percentage from the Company's pre-existing
businesses for the nine months ended April 30, 2003, as compared with the nine
months ended April 30, 2002, was primarily attributable to the
18
<Page>
charges for warranty and slow moving inventory related to the Company's
endoscope reprocessing products; sales mix as well as an increase in the cost to
manufacture the current models of the Company's endoscope reprocessing
equipment; and non-recurring unabsorbed manufacturing overhead associated with
MediVators' relocation into Minntech's facilities.
Selling expenses as a percentage of net sales were 13.4% and 13.2% for
the three and nine months ended April 30, 2003, compared with 12.0% and 11.9%
for the three and nine months ended April 30, 2002. For the three and nine
months ended April 30, 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 nine months
ended April 30, 2003, the increase in selling expenses as a percentage of net
sales was also attributable to the inclusion of the higher selling cost
structure related to the Minntech operations for the entire nine months ended
April 30, 2003, as compared to a partial period (since the date of the
acquisition) for the nine months ended April 30, 2002.
General and administrative expenses decreased by $597,000 to $3,259,000
for the three months ended April 30, 2003, from $3,856,000 for the three months
ended April 30, 2002 principally due to greater efficiencies realized as a
result of the Minntech acquisition, including the subsequent relocation of the
MediVators operations into Minntech's facilities; favorable adjustments
resulting from the settlement of liabilities initially recorded in conjunction
with the Minntech acquisition relating to severance and sales tax in the amounts
of $155,000 and $177,000, respectively; and a reduction in incentive
compensation. Partially offsetting these decreases was a $249,000
pre-acquisition workers' compensation claim that was recently assessed on the
Company by the state of Minnesota due to the bankruptcy of Minntech's former
insurance carrier.
For the nine months ended April 30, 2003, general and administrative
expenses decreased by $1,153,000 to $9,556,000, from $10,709,000 for the nine
months ended April 30, 2002 principally due to $719,000 in favorable sales tax
settlements; greater efficiencies realized as a result of the Minntech
acquisition, including the subsequent relocation of the MediVators operations
into Minntech's facilities; a favorable adjustment in the amount of $155,000
resulting from the settlement of a liability initially recorded in conjunction
with the Minntech acquisition relating to severance; a decrease in bad debt
expense due to significant charges incurred in the prior period; and a reduction
in incentive compensation. Partially offsetting these decreases were the
inclusion of the Minntech operations for the entire nine months ended April 30,
2003, as compared to a partial period (since the date of the acquisition) for
the nine months ended April 30, 2002; an increase in the cost of commercial
insurance; foreign exchange losses associated with translating certain foreign
denominated assets into functional currencies; and a $249,000 pre-acquisition
workers' compensation claim that was recently assessed on the Company by the
state of Minnesota due to the bankruptcy of Minntech's former insurance carrier.
Research and development expenses (which include continuing engineering
costs) decreased by $159,000 to $914,000 for the three months ended April 30,
2003, from $1,073,000 for the three months ended
19
<Page>
April 30, 2002. For the nine months ended April 30, 2003, research and
development expenses increased by $445,000 to $3,184,000, from $2,739,000 for
the nine months ended April 30, 2002. For the nine months ended April 30, 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, as well as the inclusion of the
Minntech operations for the entire nine months ended April 30, 2003, as compared
to a partial period (since the date of the acquisition) for the nine months
ended April 30, 2002.
Interest expense was $313,000 for the three months ended April 30,
2003, compared with $586,000 for the three months ended April 30, 2002. For the
nine months ended April 30, 2003 interest expense was $1,116,000, compared with
$1,717,000 for the nine months ended April 30, 2002. These decreases in interest
expense were attributable to lower average outstanding borrowings and lower
interest rates during the three and nine months ended April 30, 2003.
Additionally, during the nine months ended April 30, 2002 there was a 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 nine months ended April 30, 2003, as compared to a partial period
(since the date of the acquisition) for the nine months ended April 30, 2002.
Income before income taxes increased by $960,000 to $9,259,000 for the
nine months ended April 30, 2003, from $8,299,000 for the nine months ended
April 30, 2002.
The consolidated effective tax rate on operations was 36.6% and 37.6%
for the nine months ended April 30, 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 nine months ended April 30,
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 nine months ended April 30, 2003 of approximately 37.5%,
23.3% and 45.0%, respectively. The lower overall effective tax rate for the nine
months ended April 30, 2003, as compared to the nine months ended April 30,
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 April 30, 2003, the Company's working capital was $42,591,000,
compared with $37,824,000 at July 31, 2002. This increase in working capital
primarily reflects increases in cash and cash equivalents and
20
<Page>
inventory, partially offset by an increase in the current portion of long-term
debt. Inventory increased primarily due to lower than anticipated sales of
endoscopy and surgical products and the translation of Carsen's inventory using
a stronger Canadian dollar against the United States dollar.
Net cash provided by operating activities was $7,302,000 and $4,100,000
for the nine months ended April 30, 2003 and 2002, respectively. For the nine
months ended April 30, 2003, 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 an increase in
inventories and decreases in accounts payable and accrued expenses and income
taxes payable. For the nine months ended April 30, 2002, the net cash provided
by operating activities was primarily due to net income, after adjusting for
depreciation and amortization, and decreases in inventories, partially offset by
decreases in accounts payable and accrued expenses and income taxes payable.
Net cash used in investing activities was $989,000 and $30,058,000 for
the nine months ended April 30, 2003 and 2002, respectively. For the nine months
ended April 30, 2003, the net cash used in investing activities was primarily
due to capital expenditures. For the nine months ended April 30, 2002, the net
cash used in investing activities was primarily for the acquisition of Minntech.
Net cash used in financing activities was $5,201,000 for the nine
months ended April 30, 2003, compared with net cash provided by financing
activities of $29,901,000 for the nine months ended April 30, 2002. For the nine
months ended April 30, 2003, the net cash used in financing activities was
primarily attributable to repayments under the Company's credit facilities. For
the nine months ended April 30, 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 (Cantel and
Minntech are collectively referred to as 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.
21
<Page>
Borrowings under the Credit Facilities bear interest at rates ranging
from .75% to 2.00% above the lender's base rate, or at rates ranging from 2.00%
to 3.25% above the London Interbank Offered Rate ("LIBOR"), depending upon the
Company's consolidated ratio of debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA"). The base rates associated with the
U.S. lenders and the Canadian lender were 4.25% and 5.0%, respectively, at June
3, 2003, and the LIBOR rates on outstanding borrowings ranged from 1.26% to
1.43% at June 3, 2003. The margins applicable to the Company's outstanding
borrowings at June 3, 2003 are 1.25% above the lender's base rate and 2.50%
above LIBOR. At June 3, 2003, all of the Company's outstanding borrowings were
using LIBOR rates. 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%. This interest rate cap
agreement has been designated as a cash flow hedge instrument. 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 owned by Cantel and 65%
of the outstanding shares of Carsen stock owned by Cantel); and are guaranteed
by Minntech. As of April 30, 2003, the U.S. Borrowers were not in compliance
with one of the financial covenants under the Term Loan Facility and the U.S.
Revolving Credit Facility related to the Company's consolidated EBITDA during
the preceding twelve month period (actual calculation of $17,456,000 compared to
a required minimum EBITDA of $18,000,000); however, the U.S. lenders have
provided the Company with a waiver of this covenant violation.
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. As of April 30, 2003, the Canadian Borrower was in compliance with the
financial covenants under the Canadian Revolving Credit Facility.
On September 7, 2001, the Company borrowed $25,000,000 under the Term
Loan Facility and $9,000,000 under the U.S. Revolving Credit Facility in
connection with the acquisition of Minntech. At April 30, 2003, the Company had
$23,000,000 outstanding under its Credit Facilities, including $21,500,000 under
the Term Loan Facility. Subsequent to April 30, 2003, the Company repaid an
additional $500,000 under its Credit Facilities; therefore, at June 3, 2003, the
Company had $22,500,000 outstanding under its Credit Facilities including
$21,500,000 under the Term Loan Facility. Amounts repaid by the Company under
the Term Loan Facility may not be re-borrowed.
22
<Page>
Aggregate annual required maturities of the Credit Facilities over the
next five years and thereafter are as follows:
<Table>
Three month period ending July 31, 2003 $ 750,000
Fiscal 2004 4,500,000
Fiscal 2005 6,500,000
Fiscal 2006 7,750,000
Fiscal 2007 3,500,000
-----------
Total $23,000,000
===========
</Table>
The amount maturing in fiscal 2007 includes all of the amounts
outstanding under the revolving credit facilities ($1,500,000 at April 30, 2003)
as such amounts are required to be repaid prior to the expiration date of such
facilities.
Aggregate future minimum commitments at April 30, 2003 under operating
leases for property and equipment are as follows:
<Table>
Three month period ending July 31, 2003 $ 320,000
Fiscal 2004 1,142,000
Fiscal 2005 670,000
Fiscal 2006 142,000
Fiscal 2007 30,000
Thereafter 5,000
-----------
Total rental commitments $ 2,309,000
===========
</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
endoscope reprocessing products and related accessories and supplies in the
United States and Puerto Rico. Carsen is subject to a minimum purchase
requirement under the Olympus Agreement of $18.8 million during the contract
year ending March 31, 2004, and Olympus is subject to minimum purchase
projections under the MediVators Agreement. For the contract year ended March
31, 2003, Carsen satisfied the minimum purchase requirement under the Olympus
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
23
<Page>
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. At June 3, 2003, approximately $16,289,000 was available under the
revolving credit facilities.
During the three and nine months ended April 30, 2003, compared with
the three and nine months ended April 30, 2002, the average value of the
Canadian dollar increased by approximately 7.8% and 2.9%, 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. During the three and nine months ended April 30, 2003, such
strengthening of the Canadian dollar relative to the United States dollar had a
positive impact upon the Company's results of operations. 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 $10,663,000 (United States dollars) at June 3, 2003 and
cover a portion of the Canadian subsidiary's projected purchases of inventories
through February 2004. These foreign currency forward contracts have been
designated as cash flow hedge instruments. The weighted average exchange rate of
the forward contracts open at June 3, 2003 was $1.4958 Canadian dollar per
United States dollar, or $.6685 United States dollar per Canadian dollar. The
exchange rate published by the Wall Street Journal on June 3, 2003 was $1.3699
Canadian dollar per United States dollar, or $.7300 United States dollar per
Canadian dollar.
During the three and nine months ended April 30, 2003, the value of the
euro increased by approximately 23.3% and 15.7%, 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 nine months ended April 30, 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. These short-term contracts have
been designated as fair value hedge instruments. There
24
<Page>
was one foreign currency forward contract amounting to Euro 6,486,000 at June 3,
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 June 3, 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 April 30, 2003
compared to July 31, 2002, the value of the Canadian dollar and the value of the
euro increased by approximately 10.4% and 13.8%, respectively, compared to the
value of the United States dollar. The total of these currency movements
resulted in a foreign currency translation gain of $3,408,000 for the nine
months ended April 30, 2003, thereby increasing stockholders' equity.
Changes in the value of the Japanese yen relative to the United States
dollar during the three and nine months ended April 30, 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.
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.
25
<Page>
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.
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
26
<Page>
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.
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.
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
27
<Page>
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 nine months ended April 30, 2003, compared with the three and nine
months ended April 30, 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. These
foreign currency forward contracts have been designated as cash flow hedge
instruments. Total commitments for such foreign currency forward contracts
amounted to $11,206,000 (United States dollars) at April 30, 2003 and cover a
portion of Carsen's projected purchases of inventories through December 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 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 nine months ended April 30, 2003, compared
with the three and nine months ended April 30, 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. These short-term contracts have
been designated as fair value hedge instruments. There was one such foreign
currency forward contract amounting to Euro 7,303,000 at April 30, 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 June 3, 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
28
<Page>
United States dollar during the three and nine months ended April 30, 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 nine months ended April
30, 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%.
This interest rate cap agreement has been designated as a cash flow hedge
instrument. At April 30, 2003, the fair value of such interest rate cap is less
than $1,000.
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 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.
29
<Page>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There was no submission of matters to a vote during the three months
ended April 30, 2003.
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
April 30, 2003.
30
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CANTEL MEDICAL CORP.
Date: June 13, 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)
31
<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: June 13, 2003
By: /s/ James P. Reilly
-----------------------------------
James P. Reilly, President and Chief
Executive Officer (Principal Executive
Officer)
32
<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: June 13, 2003
By: /s/ Craig A. Sheldon
-----------------------------------------
Craig A. Sheldon, Senior Vice President and
Chief Financial Officer (Principal Financial and
Accounting Officer)
33