SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

ý Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the quarterly period ended January 31, 2005.

o 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: 001-31337

CANTEL MEDICAL CORP.

(Exact name of registrant as specified in its charter)

Delaware		22-1760285
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer 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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ý No o

Number of shares of Common Stock outstanding as of February 28, 2005: 14,940,674

PART I - FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar Amounts in Thousands, Except Share Data)

(Unaudited)

	January 31, 2005			July 31, 2004
Assets
Current assets:
Cash and cash equivalents	$	21,601		$	17,862
Accounts receivable, net of allowance for doubtful accounts of $1,032 at January 31 and $1,372 at July 31	30,342			29,324
Inventories:
Raw materials	6,535			6,632
Work-in-process	2,553			2,065
Finished goods	13,173			13,756
Total inventories	22,261			22,453
Deferred income taxes	3,170			2,806
Prepaid expenses and other current assets	1,541			1,418
Total current assets	78,915			73,863
Property and equipment, net	23,209			22,715
Intangible assets, net	13,773			13,897
Goodwill	33,878			33,330
Other assets	3,104			2,562
	$	152,879		$	146,367
Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt	$	4,000		$	3,000
Accounts payable	8,477			10,325
Compensation payable	3,293			3,450
Accrued expenses	8,795			7,403
Income taxes payable	939			2,950
Total current liabilities	25,504			27,128

Long-term debt	15,250			22,000
Deferred income taxes	9,256			7,533
Other long-term liabilities	3,465			3,195

Stockholders’ equity:
Preferred Stock, par value $1.00 per share; authorized 1,000,000 shares; none issued	—			—
Common Stock, $.10 par value; authorized 20,000,000 shares; January 31 - 15,351,969 shares issued and 14,909,766 shares outstanding; July 31 - 15,051,573 shares issued and 14,611,731 shares outstanding	1,535			1,505
Additional capital	57,073			53,315
Retained earnings	37,175			30,193
Accumulated other comprehensive income	5,317			3,145
Treasury Stock, at cost; January 31 - 442,203 shares; July 31 - 439,842 shares	(1,696		)	(1,647		)
Total stockholders’ equity	99,404			86,511
	$	152,879		$	146,367

See accompanying notes.

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollar Amounts in Thousands, Except Per Share Data)

(Unaudited)

	Three Months Ended January 31,						Six Months Ended January 31,
	2005			2004			2005			2004

Net sales:
Product sales	$	43,492		$	35,771		$	83,319		$	67,676
Product service	6,044			5,325			11,559			10,269
Total net sales	49,536			41,096			94,878			77,945

Cost of sales:
Product sales	26,933			22,310			51,495			42,702
Product service	3,782			3,667			7,347			6,951
Total cost of sales	30,715			25,977			58,842			49,653

Gross profit	18,821			15,119			36,036			28,292

Operating expenses:
Selling	5,814			5,001			11,222			9,701
General and administrative	5,367			4,400			10,817			8,574
Research and development	1,022			1,103			2,006			2,173
Total operating expenses	12,203			10,504			24,045			20,448

Income before interest, other income and income taxes	6,618			4,615			11,991			7,844

Interest expense	420			473			849			925
Interest income	(107		)	(42		)	(185		)	(65		)
Other income	—			(15		)	—			(29		)

Income before income taxes	6,305			4,199			11,327			7,013

Income taxes	2,430			1,626			4,345			2,645

Net income	$	3,875		$	2,573		$	6,982		$	4,368

Earnings per common share:
Basic	$	0.26		$	0.18		$	0.47		$	0.31

Diluted	$	0.24		$	0.17		$	0.44		$	0.29

See accompanying notes.

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar Amounts in Thousands)

(Unaudited)

	Six Months Ended January 31,
	2005			2004

Cash flows from operating activities
Net income	$	6,982		$	4,368
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	2,256			2,084
Amortization of debt issuance costs	286			268
Loss on disposal of fixed assets	36			2
Impairment of long-lived assets	—			153
Deferred income taxes	1,902			876
Changes in assets and liabilities:
Accounts receivable	143			(192		)
Inventories	1,111			78
Prepaid expenses and other current assets	(861		)	(1,103		)
Accounts payable and accrued expenses	(2,069		)	(2,543		)
Income taxes payable	(1,789		)	(25		)
Net cash provided by operating activities	7,997			3,966

Cash flows from investing activities
Capital expenditures	(1,856		)	(945		)
Proceeds from disposal of fixed assets	8			18
Acquisition of Biolab, net of cash acquired	—			(7,782		)
Acquisition of Mar Cor, net of cash acquired	—			(7,979		)
Acquisition of Dyped, net of cash acquired	—			(696		)
Other, net	(18		)	(275		)
Net cash used in investing activities	(1,866		)	(17,659		)

Cash flows from financing activities
Borrowings under term loan facility	—			4,250
Borrowings under revolving credit facilities	—			4,800
Repayments under term loan facility	(2,750		)	(1,500		)
Repayments under revolving credit facilities	(3,000		)	(2,500		)
Proceeds from exercises of stock options	2,305			617
Net cash (used in) provided by financing activities	(3,445		)	5,667

Effect of exchange rate changes on cash and cash equivalents	1,053			1,084

Increase (decrease) in cash and cash equivalents	3,739			(6,942		)
Cash and cash equivalents at beginning of period	17,862			17,018
Cash and cash equivalents at end of period	$	21,601		$	10,076

See accompanying notes.

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. (“Cantel”) on Form 10-K for the fiscal year ended July 31, 2004 (the “2004 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 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, 2004 was derived from the audited consolidated balance sheet of the Company at that date.

Cantel had five operating companies (collectively, with Cantel, referred to as the “Company”) at July 31, 2004. Minntech Corporation (“Minntech”), Carsen Group Inc. (“Carsen”), Mar Cor Services, Inc. (“Mar Cor”), and Saf-T-Pak, Inc. (“Saf-T-Pak”) are wholly-owned operating subsidiaries of Cantel. Biolab Equipment Ltd. (“Biolab”) is a wholly-owned operating subsidiary of Carsen.

Minntech designs, develops, manufactures, markets and distributes disinfection/sterilization reprocessing systems, sterilants and other supplies for renal dialysis; filtration and separation products for medical and non-medical applications; and endoscope reprocessing systems, sterilants and other supplies. On September 12, 2003, Minntech acquired the endoscope reprocessing systems and accessory infection control technologies of The Netherlands based Dyped Medical B.V. (“Dyped”). Minntech also provides technical maintenance services for its products.

Carsen is engaged in the marketing and distribution of endoscopy and surgical, endoscope reprocessing and scientific products in Canada and also provides technical maintenance services for its products.

Biolab and Mar Cor, which were acquired on August 1, 2003, provide water treatment equipment design and manufacturing, project management, installation, maintenance, deionization and mixing systems to the medical, pharmaceutical, biotechnology, research, beverage and semiconductor industries.

Saf-T-Pak, which was acquired on June 1, 2004, provides

specialty packaging products and compliance training services for the safe transport of infectious and biological specimens.

The acquisitions of Dyped, Biolab, Mar Cor and Saf-T-Pak are more fully described in note 3 to the condensed consolidated financial statements.

During fiscal 2004, the Company changed its internal reporting processes to include Product Service with the corresponding product segments to reflect the way the Company, through its executive management, manages, allocates resources and measures the performance of its businesses. Previously, Product Service, which consisted of technical maintenance service on the Company’s products, was reported as a separate operating segment. All prior period segment results have been restated to reflect this change.

During January 2005, the Company issued 5,095,000 additional shares in connection with a three-for-two stock split effected in the form of a 50% stock dividend paid on January 12, 2005 to stockholders of record on January 5, 2005. The effect of the stock split has been recognized retroactively in the stockholders’ equity accounts in the condensed consolidated balance sheets, and in all share data in the condensed consolidated financial statements, notes to condensed consolidated financial statements, and management’s discussion and analysis of financial condition and results of operations.

Note 2. Stock-Based Compensation

The Company accounts for its stock option plans using the intrinsic value method under the provisions of Accounting Principal Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. Under the provisions of APB 25, the Company grants stock options with exercise prices at the fair value of the shares at the date of grant 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 over the vesting period as prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Stock-Based Compensation” (“SFAS 123”), net income and earnings per share would have been as follows:

	Three Months Ended January 31,						Six Months Ended January 31,
	2005			2004			2005			2004
Net income:
As reported	$	3,875,000		$	2,573,000		$	6,982,000		$	4,368,000
Stock-based employee compensation expense determined under fair value based model, net of tax	(639,000		)	(394,000		)	(1,099,000		)	(711,000		)
Pro forma	$	3,236,000		$	2,179,000		$	5,883,000		$	3,657,000

Earnings per common share - basic:
As reported	$	0.26		$	0.18		$	0.47		$	0.31
Pro forma	$	0.22		$	0.16		$	0.40		$	0.26

Earnings per common share - diluted:
As reported	$	0.24		$	0.17		$	0.44		$	0.29
Pro forma	$	0.20		$	0.14		$	0.37		$	0.24

The pro forma effect on net income for these periods may not be representative of the pro forma effect on net income in future periods.

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 of the option. 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 stock options.

Shares of common stock issued from the exercise of stock options were 248,654 and 298,162 during the three and six months ended January 31, 2005, respectively, and 111,014 and 131,171 during the three and six months ended January 31, 2004, respectively.

Note 3. Acquisitions

Biolab

On August 1, 2003, the Company acquired all of the issued and outstanding stock of Biolab, a private company in the water treatment industry with historical pre-acquisition annual revenues of approximately $10,000,000. Biolab designs, manufactures, sells and provides maintenance and installation services for high purity water systems for the medical, pharmaceutical, biotechnology, research, beverage and semiconductor industries. Biolab has locations in Oakville, Ontario and Dorval, Quebec.

The total consideration for the transaction, including transaction costs and assumption of debt, was approximately $7,876,000. Under the terms of the purchase agreement, the Company may pay additional consideration at the end of each fiscal year, up to an aggregate of $3,000,000 for the three year period ending July 31, 2006, based upon Biolab achieving specified targets of earnings before interest, taxes, depreciation and amortization (“EBITDA”). As of January 31, 2005, none of the additional purchase price had been earned.

The purchase price was allocated to the assets acquired and assumed liabilities as follows: current assets $4,230,000; property and equipment $590,000; intangible assets $1,765,000 including current technology $339,000 (10-year life), customer relationships $664,000 (10-year life) and trademarks and tradenames $762,000 (indefinite life); other assets $5,000; current liabilities $1,966,000; and long-term liabilities $1,181,000. The weighted average life of these intangible assets (excluding such assets with an indefinite life) was approximately 10 years. The excess purchase price of $4,433,000 was assigned to goodwill. Such goodwill, all of which is non-deductible for income tax purposes, has been included in the Company’s Water Treatment operating segment.

Mar Cor

On August 1, 2003, the Company acquired all of the issued and outstanding stock of Mar Cor, a private company in the water treatment industry with historical pre-acquisition annual revenues of approximately $10,000,000. Mar Cor, based in Skippack, Pennsylvania with locations in Atlanta and Chicago, is primarily a service-oriented company providing design, installation, service and maintenance, training and supplies for water and fluid treatment systems to the medical, research, and pharmaceutical industries.

The total consideration for the transaction, including transaction costs and assumption of debt, was approximately $8,215,000.

The purchase price was allocated to the assets acquired and assumed liabilities as follows: current assets $3,254,000; property and equipment $947,000; intangible assets $1,483,000 including customer relationships $480,000 (10-year life), covenant-not-to-compete $169,000 (3-year life) and trademarks and tradenames $834,000 (indefinite life); other assets $17,000; current liabilities $2,094,000; and long-term liabilities $636,000. The weighted average life of these intangible assets (excluding such assets with an indefinite life) was approximately 8 years. The excess purchase price of $5,244,000 was assigned to goodwill. Such goodwill, all of which is non-deductible for income tax purposes, has been included in the Company’s Water Treatment operating segment.

The reasons for the acquisitions of Biolab and Mar Cor were as follows: (i) the overall strategic fit of water treatment with the Company’s existing dialysis and filtration technology businesses; (ii) the opportunity to grow the Company’s existing businesses and the water treatment business by combining Minntech’s sales, marketing, and product development capabilities with Mar Cor’s regional field service organization and Biolab’s water treatment equipment design and manufacturing expertise; (iii) the opportunity to expand and diversify the Company’s infection prevention and control business, particularly within the pharmaceutical and biotechnology industries; and (iv) the expectation that the acquisitions would be accretive to the Company’s earnings per share.

The acquisitions of Biolab and Mar Cor are reflected in the Company’s results of operations for the three and six months ended January 31, 2005 and 2004.

Dyped

On September 12, 2003, the Company acquired the endoscope reprocessing systems and infection control technologies of Dyped, a private company based in The Netherlands. The total consideration for the transaction, including transaction costs, was approximately $1,812,000 and included a note payable in five annual installments with a present value of approximately $1,211,000 (with a face value of $1,505,000). The Company agreed to pay additional purchase price of approximately $557,000 over a three year period contingent upon the achievement of certain research and development objectives.

However, as of January 31, 2005, none of the additional purchaseprice had been earned and only $456,000 may be payable contingent upon the achievement of the remaining research and development objectives. The primary reason for the acquisition of Dyped was to expand Minntech’s technological capabilities and augment its endoscope reprocessing product line with a new, fully automated reprocessor designed to be compliant with emerging European standards and future market requirements.

The purchase price was allocated to the assets acquired and assumed liabilities as follows: current assets $503,000; property and equipment $14,000; intangible assets $664,000 including current technology $585,000 (8-year life) and customer relationships $79,000 (4-year life); current liabilities $777,000; and long-term liabilities $232,000. The weighted average life of these intangible assets was approximately 7.5 years. The excess purchase price of $1,640,000 was assigned to goodwill. Such goodwill, all of which is non-deductible for income tax purposes, has been included in the Company’s Endoscope Reprocessing operating segment.

Dyped is reflected in the Company’s results of operations for the three and six months ended January 31, 2005, the three months ended January 31, 2004 and the portion of the six months ended January 31, 2004 subsequent to its acquisition on September 12, 2003. The acquisition of Dyped did not have a significant impact upon sales and net income for the three and six months ended January 31, 2005 and 2004.

Saf-T-Pak

On June 1, 2004, the Company acquired all of the issued and outstanding stock of Saf-T-Pak, a private company located in Edmonton, Alberta with pre-acquisition annual revenues of approximately $5,000,000 and pre-acquisition annual operating income of approximately $1,800,000 for its latest fiscal year ended August 31, 2003. Saf-T-Pak is a designer and manufacturer of specialized packaging for the safe transport of infectious and biological specimens. Saf-T-Pak also offers a full array of compliance training services ranging from software and internet sessions to group seminars and private on-site programs.

The total consideration for the transaction, including transaction costs, was approximately $8,522,000. Under the terms of the purchase agreement, the Company may pay additional consideration at the end of each fiscal year, up to an aggregate of $3,094,000 for the thirty-eight month period ending July 31, 2007, based upon Saf-T-Pak achieving specified targets of EBITDA. As of January 31, 2005, none of the additional purchase price had been earned.

The purchase price was allocated to the assets acquired and assumed liabilities as follows: current assets $1,341,000; property and equipment $54,000; intangible assets $3,820,000 including current technology $2,035,000 (9-year weighted average life), customer relationships $1,119,000 (5-year weighted average life), and trademarks and tradenames $666,000 (indefinite life); current liabilities $584,000; and non-current deferred income tax liabilities $1,411,000. The weighted average life of these

intangible assets (excluding such assets with an indefinite life) was approximately 7 years. The excess purchase price of $5,302,000 was assigned to goodwill. Such goodwill, all of which is non-deductible for income tax purposes, has been included in the Company’s Specialty Packaging operating segment.

The reasons for the acquisition of Saf-T-Pak were as follows: (i) the opportunity to expand and diversify the Company’s infection prevention and control business; (ii) the opportunity for Cantel to enter into the specialized packaging market for the transport of infectious and biological substances, which is a market that has undergone recent government regulatory changes creating attractive market dynamics; and (iii) the expectation that the acquisition will be accretive to the Company’s earnings per share.

Since the Saf-T-Pak acquisition occurred on June 1, 2004, the results of operations of Saf-T-Pak are included for the three and six months ended January 31, 2005 and are excluded from the Company’s results of operations for the three and six months ended January 31, 2004.

Selected unaudited pro forma consolidated statements of income data assuming Saf-T-Pak was included in the Company’s results of operations as of the beginning of the three and six month period ended January 31, 2004 is as follows:

	Three Months Ended January 31,				Six Months Ended January 31,
	2005		2004		2005		2004

Net sales	$	49,536,000	$	42,173,000	$	94,878,000	$	80,099,000
Net income	$	3,875,000	$	2,702,000	$	6,982,000	$	4,626,000
Earnings per share:
Basic	$	0.26	$	0.19	$	0.47	$	0.33
Diluted	$	0.24	$	0.18	$	0.44	$	0.31
Weighted average common shares:
Basic	14,782,000		14,014,000		14,706,000		13,992,000
Diluted	16,182,000		15,090,000		16,044,000		14,958,000

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 acquisition actually occurred at the beginning of the three and six months ended January 31, 2004, nor does it necessarily indicate the combined company’s future operating results.

The results presented in the selected unaudited pro forma consolidated statements of income data have been prepared using the following assumptions: (i) cost of sales reflects a step-up in the cost basis of Saf-T-Pak’s inventories; (ii) amortization of intangible assets based upon the final appraised fair values and useful lives of such assets; (iii) interest expense on the senior bank debt at an effective interest rate of 5% per annum; (iv) bonuses for former owners which relate to distributions of earnings have been decreased to be consistent with Cantel’s management

incentive bonus structure; and (v) calculation of the income tax effects of the pro forma adjustments. All other operating results reflect actual performance.

There were no in-process research and development projects acquired in connection with the Biolab, Mar Cor, Dyped and Saf-T-Pak acquisitions.

Certain of the assumed liabilities relating to the Biolab, Mar Cor, Dyped and Saf-T-Pak acquisitions are subjective in nature. These liabilities have been reflected based upon the most recent information available and principally include certain potential income tax exposures. The ultimate settlement of such liabilities may be for amounts which are different from the amounts presently recorded. Settlements related to income tax exposures, if any, would be adjusted through goodwill.

Note 4. Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123, “Share-Based Payment (Revised 2004)” (“SFAS 123R”), which amends SFAS 123. SFAS 123R requires companies to measure and recognize compensation costs relating to share-based payment transactions in the financial statements at fair value. SFAS 123R is effective for all interim periods beginning after June 15, 2005 and therefore will be effective for the beginning of the Company’s fiscal 2006. The Company is currently evaluating the impact of SFAS 123R on the Company’s financial position and results of operations. However, as more fully described in note 2 to the condensed consolidated financial statements, the Company has disclosed the effects on reported net income and earnings per share had the Company recognized compensation expense in accordance with SFAS 123.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS 151”) for the purpose of eliminating any narrow differences existing between the FASB standards and the standards issued by the International Accounting Standards Board regarding inventory costs by clarifying that any abnormal idle facility expense, freight, handling costs and spoilage be recognized as current-period charges. SFAS 151 is effective for fiscal years beginning after June 15, 2005 and therefore will be effective for the beginning of the Company’s fiscal 2006. The Company does not expect the adoption of SFAS 151 to have a significant impact on the Company’s financial position or results of operations.

Note 5. Comprehensive Income

The Company’s comprehensive income for the three and six months ended January 31, 2005 and 2004 is set forth in the following table:

	Three Months Ended January 31,					Six Months Ended January 31,
	2005			2004		2005			2004

Net income	$	3,875,000		$	2,573,000	$	6,982,000		$	4,368,000
Other comprehensive income (loss):
Unrealized gain (loss) on currency hedging, net of tax	486,000			257,000		(581,000		)	(173,000		)
Unrealized gain on interest rate cap, net of tax	—			13,000		5,000			27,000
Foreign currency translation, net of tax	(351,000		)	677,000		2,748,000			2,003,000
Comprehensive income	$	4,010,000		$	3,520,000	$	9,154,000		$	6,225,000

Note 6. Financial Instruments

The Company accounts for derivative instruments and hedging activities in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“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.

Carsen purchases and pays for a substantial portion of its products in United States dollars and sells its products in Canadian 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 $24,400,000 (United States dollars) at January 31, 2005 and cover a portion of Carsen’s projected purchases of inventories through July 2006. Under the Canadian Revolving Credit Facility, such commitments may not exceed $35,000,000 (United States dollars) in an aggregate notional amount at any time.

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, Minntech enters into short-term contracts to purchase euros forward, which contracts are generally one month in duration. These short-term contracts have been designated as fair value hedge instruments. There were no such foreign currency forward contracts at January 31, 2005; however, one contract amounting to €3,156,000 was entered into on February 1, 2005 which covers certain assets and liabilities of Minntech’s Netherlands subsidiary which are denominated in United States dollars. Such contract expired on February 28, 2005. 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 foreign currency forward contracts 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 are 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.

Note 7. Intangibles and Goodwill

The Company’s intangible assets which continue to be subject to amortization consist primarily of technology, customer relationships, 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 3-20 years and have a weighted average amortization period of 10 years as of January 31, 2005. Amortization expense related to intangible assets was $409,000 and $840,000 for the three and six months ended January 31, 2005, respectively, and $258,000 and $612,000 for the three and six months ended January 31, 2004, respectively. The Company’s intangible assets that have indefinite useful lives and therefore are not amortized consist of trademarks and tradenames.

The Company’s intangible assets consist of the following:

	January 31, 2005
	Gross		Accumulated Amortization			Net
Intangible assets with finite lives:
Technology	$	8,161,000	$	(1,652,000	)	$	6,509,000
Customer relationships	5,264,000		(1,811,000		)	3,453,000
Non-compete agreements	169,000		(84,000		)	85,000
Patents and other registrations	311,000		(25,000		)	286,000
	13,905,000		(3,572,000		)	10,333,000
Trademarks and tradenames	3,440,000		—			3,440,000
Total intangible assets	$	17,345,000	$	(3,572,000	)	$	13,773,000

	July 31, 2004
	Gross		Accumulated Amortization			Net
Intangible assets with finite lives:
Technology	$	7,901,000	$	(1,297,000	)	$	6,604,000
Customer relationships	5,114,000		(1,410,000		)	3,704,000
Non-compete agreements	169,000		(56,000		)	113,000
Patents and other registrations	155,000		(13,000		)	142,000
	13,339,000		(2,776,000		)	10,563,000
Trademarks and tradenames	3,334,000		—			3,334,000
Total intangible assets	$	16,673,000	$	(2,776,000	)	$	13,897,000

Estimated amortization expense of the Company’s intangible assets for the remainder of fiscal 2005 and the next five years is as follows:

Six month period ending July 31, 2005	$	805,000
Fiscal 2006	1,624,000
Fiscal 2007	1,567,000
Fiscal 2008	1,382,000
Fiscal 2009	1,061,000
Fiscal 2010	877,000

During the six months ended January 31, 2005, goodwill increased as follows:

	Acquisition-Related							January 31, 2005
	July 31, 2004		Income Tax Reserve Reductions			Foreign Currency Translation		January 31, 2005

Dialysis	$	8,958,000	$	(257,000	)	$	—	$	8,701,000
Endoscopy and Surgical	207,000		—			15,000		222,000
Endoscope Reprocessing	6,245,000		—			146,000		6,391,000
Water Treatment	9,907,000		—			332,000		10,239,000
Filtration and Separation	2,575,000		(74,000		)	—		2,501,000
All Other	5,438,000		—			386,000		5,824,000
Total	$	33,330,000	$	(331,000	)	$	879,000	$	33,878,000

On July 31, 2004, management performed impairment studies of the Company’s goodwill and trademark and tradenames and concluded that such assets were not impaired.

Note 8. Warranty

A summary of activity in the warranty reserves follows:

	Three Months Ended January 31,						Six Months Ended January 31,
	2005			2004			2005			2004

Beginning balance	$	696,000		$	396,000		$	658,000		$	353,000
Provisions	245,000			289,000			485,000			582,000
Charges	(178,000		)	(173,000		)	(385,000		)	(477,000		)
Foreign currency translation	—			1,000			5,000			2,000
Acquisitions	—			—			—			53,000
Ending balance	$	763,000		$	513,000		$	763,000		$	513,000

The warranty provisions and charges during the three and six months ended January 31, 2005 and 2004 relate principally to the Company’s endoscope reprocessing products.

Note 9. Financing Arrangements

The Company’s 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”), (ii) a $17,500,000 senior secured revolving credit facility from the U.S. lenders (the “U.S. Revolving Credit Facility”) 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”)(the Term Loan Facility and the U.S. Revolving Credit Facility are collectively referred to as the “U.S. Credit Facilities”), and (iii) a $6,000,000 (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 (the U.S. Credit Facilities and the Canadian Revolving Credit Facility are collectively referred to as the “Credit Facilities”).

For the six months ended January 31, 2005, borrowings under the Credit Facilities bore interest at rates ranging from .75% to 2.00% above the lenders’ base rate, or at rates ranging from 2.00% to 3.25% above LIBOR, depending upon the Company’s consolidated ratio of debt to EBITDA. The base rates associated with the U.S. lenders and the Canadian lender were 5.25% and 4.25%, respectively, at January 31, 2005, and the LIBOR rates ranged from 2.27% to 2.96% at January 31, 2005. The margins applicable to the Company’s outstanding borrowings at January 31, 2005 were 0.75% above the lenders’ base rate and 2.00% above LIBOR. At January 31, 2005, all of the Company’s outstanding borrowings were under LIBOR contracts. The Credit Facilities also provide for fees on the unused portion of such facilities at rates which ranged from .30% to .50%, depending upon the Company’s consolidated ratio of debt to EBITDA.

allowed consideration paid for an acquisition was increased from $5,000,0000 to $25,000,000, (iii) a feature was added that gives the Company the ability to increase the U.S. Revolving Credit Facility from $17,500,000 up to $40,000,000 at any time on or before the U.S Revolving Credit Facility’s termination date upon mutual agreement from the lenders and the Company, (iv) certain financial covenants were modified to allow for the potential increased borrowings and capital expenditures, (v) fees on the unused portion of the U.S. Revolving Credit Facility were decreased to rates ranging from .20% to .35%, depending upon the Company’s consolidated ratio of debt to EBITDA, and (vi) the requirement that determined the available borrowings under the U.S. Revolving Credit Facility, which was based upon percentages of the eligible accounts receivable and inventories of Cantel, Minntech and Mar Cor, was eliminated. Therefore, the margins applicable to the Company’s outstanding borrowings decreased on February 17, 2005 to the lenders’ base rate and 1.00% above LIBOR.

The U.S. Credit Facilities require the U.S. Borrowers to meet certain financial covenants; are secured by substantially all assets of the U.S. Borrowers and Mar Cor (including a pledge of the stock of Minntech and Mar Cor owned by Cantel and 65% of the outstanding shares of Carsen stock and Saf-T-Pak stock owned by Cantel); are guaranteed by Minntech and Mar Cor; permit the Company to guarantee the lease on Mar Cor’s facility; and expire on August 1, 2008. As of January 31, 2005, the Company was in compliance with the financial covenants under the U.S. Credit Facilities.

The Canadian Revolving Credit Facility provides for available borrowings based upon percentages of the eligible accounts receivable and inventories of Carsen and Biolab; requires the Canadian Borrower to meet certain financial covenants; is secured by substantially all assets of the Canadian Borrower and Biolab; and expires on September 7, 2006. As of January 31, 2005, Carsen was in compliance with the financial covenants under the Canadian Revolving Credit Facility.

At January 31, 2005, the Company had $19,250,000 outstanding under the Term Loan Facility and had no outstanding borrowings under either the U.S. Revolving Credit Facility or the Canadian Revolving Credit Facility. Amounts repaid by the Company under the Term Loan Facility may not be re-borrowed. Subsequent to January 31, 2005, the Company prepaid an additional $1,000,000 under the Term Loan Facility; therefore, at February 28, 2005, the Company had $18,250,000 outstanding under its Term Loan Facility.

At January 31, 2005, aggregate annual required maturities of the Term Loan Facility are as follows:

Six month period ending July 31, 2005	$	1,500,000
Fiscal 2006	5,000,000
Fiscal 2007	6,000,000
Fiscal 2008	6,750,000
Total	$	19,250,000

Note 10. 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.

The following table sets forth the computation of basic and diluted earnings per common share:

	Three Months Ended January 31,				Six Months Ended January 31,
	2005		2004		2005		2004
Numerator for basic and diluted earnings per common share:
Net income	$	3,875,000	$	2,573,000	$	6,982,000	$	4,368,000

Denominator for basic and diluted earnings per common share:
Denominator for basic earnings per common share - weighted average number of shares outstanding	14,782,348		14,013,753		14,706,332		13,992,493

Dilutive effect of common stock equivalents using the treasury stock method and the average market price for the period	1,400,105		1,076,226		1,338,156		965,513

Denominator for diluted earnings per common share - weighted average number of shares outstanding and common stock equivalents	16,182,453		15,089,979		16,044,488		14,958,006

Basic earnings per common share	$	0.26	$	0.18	$	0.47	$	0.31

Diluted earnings per common share	$	0.24	$	0.17	$	0.44	$	0.29

Note 11. Income Taxes

The consolidated effective tax rate on income before income taxes was 38.4% and 37.7% for the six months ended January 31, 2005 and 2004, respectively. The Company has provided 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 Federal net operating loss carryforwards accumulated in the United States.

rates during the six months ended January 31, 2005 of approximately 35.3% and 45.0%, respectively. The higher overall effective tax rate for the six months ended January 31, 2005, as compared with the six months ended January 31, 2004, is principally due to the geographic mix of pretax income and the loss from operations at the Company’s Netherlands subsidiary for which no tax benefit was recorded.

Note 12. Operating Segments

In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”), 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. During fiscal 2004, the Company changed its internal reporting processes to include Product Service with the corresponding product segments to reflect the way the Company, through its executive management, manages, allocates resources and measures the performance of its businesses. Previously, Product Service, which consisted of technical maintenance service on the Company’s products, was reported as a separate operating segment. All prior period segment results have been restated to reflect this change.

The Company’s segments are as follows:

Dialysis, which includes disinfection/sterilization reprocessing equipment, sterilants, supplies, concentrates and electronic equipment related to hemodialysis treatment of patients with acute kidney failure or chronic kidney failure associated with end-stage renal disease.

Endoscopy and Surgical, which includes diagnostic and therapeutic medical equipment such as flexible and rigid endoscopes, surgical equipment and related accessories that are sold to hospitals. Additionally, this segment includes technical maintenance service on its products.

Endoscope Reprocessing, which includes endoscope disinfection equipment, disinfectants and related accessories and supplies that are sold to hospitals, clinics and physicians. Additionally, this segment includes technical maintenance service on its products.

Water Treatment, which includes water treatment equipment design and manufacturing, project management, installation, maintenance, deionization and mixing systems for the medical, pharmaceutical, biotechnology, research, beverage and semiconductor industries.

Filtration and Separation, which includes hollow fiber filter devices and ancillary products for use in cardiosurgery as well as for high-purity fluid and gas filtration systems in the pharmaceutical, electronics, medical, and biotechnology industries.

All Other

The All Other segment is comprised of the Scientific operating segment and the Company’s Specialty Packaging operating segment, which was added as a result of the Saf-T-Pak acquisition on June 1, 2004. In accordance with quantitative thresholds established by SFAS 131, the Company combined the Scientific operating segment and the Specialty Packaging operating segment into the All Other segment.

Scientific, which includes microscopes and high performance image analysis hardware and related accessories that are sold to educational institutions, hospitals and government and industrial laboratories, and industrial technology equipment such as borescopes, fiberscopes and video image scopes that are sold primarily to large industrial companies. Additionally, this segment includes technical maintenance service on its products.

Specialty Packaging, which include specialized packaging for the safe transport of infectious and biological specimens, and compliance training services ranging from software and internet sessions to group seminars and private on-site programs.

The operating segments follow the same accounting policies used for the Company’s condensed consolidated financial statements as described in note 2 to the 2004 Form 10-K.

Operating segment information is summarized below:

	Three Months Ended January 31,						Six Months Ended January 31,
	2005			2004			2005			2004
Net sales:
Dialysis	$	16,353,000		$	14,867,000		$	33,105,000		$	29,639,000
Endoscopy and Surgical	10,696,000			8,707,000			17,916,000			15,616,000
Endoscope Reprocessing	7,353,000			6,073,000			14,077,000			11,401,000
Water Treatment	5,477,000			5,411,000			9,921,000			9,951,000
Filtration and Separation	4,565,000			3,369,000			8,358,000			6,888,000
All Other	5,092,000			2,669,000			11,501,000			4,450,000
Total	$	49,536,000		$	41,096,000		$	94,878,000		$	77,945,000

Operating income:
Dialysis	$	1,881,000		$	1,946,000		$	4,153,000		$	3,404,000
Endoscopy and Surgical	2,623,000			2,225,000			4,254,000			3,633,000
Endoscope Reprocessing	1,221,000			436,000			2,360,000			978,000
Water Treatment	310,000			188,000			41,000			303,000
Filtration and Separation	1,252,000			762,000			2,312,000			1,454,000
All Other	570,000			69,000			1,295,000			14,000
	7,857,000			5,626,000			14,415,000			9,786,000
General corporate expenses	(1,239,000		)	(1,011,000		)	(2,424,000		)	(1,942,000		)
Interest expense, net	(313,000		)	(416,000		)	(664,000		)	(831,000		)
Income before income taxes	$	6,305,000		$	4,199,000		$	11,327,000		$	7,013,000

Note 13. Legal Proceedings

In the normal course of business, the Company is subject to pending and threatened legal actions. It is the Company’s policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount of anticipated exposure can be reasonably estimated.

In November 2003, HDC Medical Inc., a Kentucky corporation, filed a complaint against Minntech in the United States District Court, Western District of Kentucky (Case No. 3:03W-694-S). A motion was granted to the Company to transfer the case to the U.S. District Court in Minnesota. The plaintiff alleges that Minntech has violated federal antitrust laws, including the Sherman Act and the Clayton Act. In addition to requesting an injunction enjoining Minntech from continuing in alleged unlawful conduct, the plaintiff seeks an unspecified amount of actual damages, punitive damages, additional and/or treble statutory damages, and costs of suit. The Company believes that the allegations made in the complaint are without merit and it intends to vigorously defend the action. The case is in the discovery phase and is expected to be ready for trial in December 2005.

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 six months ended January 31, 2005, compared with the three and six months ended January 31, 2004 (increase in value of approximately 8.3% and 7.4% for the three and six months ended January 31, 2005, respectively, as compared with the three and six months ended January 31, 2004, based upon average exchange rates reported by banking institutions), (ii) the impact on the Company’s results of operations of a stronger euro against the United States dollar during the three and six months ended January 31, 2005, compared with the three and six months ended January 31, 2004 (increase in value of approximately 8.2% and 8.3% for the three and six months ended January 31, 2005, respectively, compared with the three and six months ended January 31, 2004, based upon average exchange rates reported by banking institutions), (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) 5,095,000 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 January 2005, (v) the Company’s acquisition of Saf-T-Pak on June 1, 2004, as more fully described in note 3 to the condensed consolidated financial statements, and (vi) the change in the Company’s segment reporting, as more fully described elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Since the Saf-T-Pak acquisition occurred on June 1, 2004, Saf-T-Pak is reflected in the Company’s results of operations for the three and six months ended January 31, 2005, and is not reflected in the Company’s results of operations for the three and six months ended January 31, 2004. The acquisition of Saf-T-Pak has added the Specialty Packaging operating segment to the Company, which is included in the All Other reportable segment.

Discussion herein of the Company’s pre-existing business refers to the operations of Cantel, Carsen, Minntech, Biolab and Mar Cor, but excludes the impact of the Saf-T-Pak 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, 2004 (the “2004 Form 10-K”).

The following table gives information as to the net sales and the percentage to the total net sales by each reportable segment of the Company:

	Three Months Ended January 31,						Six Months Ended January 31,
	2005			2004			2005			2004
	(Dollar amounts in thousands)
	$		%	$		%	$		%	$		%
Dialysis	$	16,353	33.0	$	14,867	36.2	$	33,105	34.9	$	29,639	38.0
Endoscopy and Surgical	10,696		21.6	8,707		21.2	17,916		18.9	15,616		20.0
Endoscope Reprocessing	7,353		14.8	6,073		14.8	14,077		14.8	11,401		14.6
Water Treatment	5,477		11.1	5,411		13.1	9,921		10.5	9,951		12.8
Filtration and Separation	4,565		9.2	3,369		8.2	8,358		8.8	6,888		8.9
All Other	5,092		10.3	2,669		6.5	11,501		12.1	4,450		5.7
	$	49,536	100.0	$	41,096	100.0	$	94,878	100.0	$	77,945	100.0

During fiscal 2004, the Company changed its internal reporting processes to include Product Service within the corresponding product segments to reflect the way the Company, through its executive management, manages, allocates resources and measures the performance of its businesses. Previously, Product Service, which consisted of technical maintenance service on the Company’s products, was reported as a separate operating segment. All prior period segment results have been restated to reflect this change.

The All Other segment is comprised of the Scientific operating segment and the Company’s new operating segment, Specialty Packaging, which was added as a result of the Saf-T-Pak acquisition on June 1, 2004.

Net sales increased by $8,440,000, or 20.5%, to $49,536,000 for the three months ended January 31, 2005, from $41,096,000 for the three months ended January 31, 2004. Net sales contributed by Saf-T-Pak for the three months ended January 31, 2005 were $1,060,000. Net sales of the Company’s pre-existing business increased by $7,380,000, or 18.0%, to $48,476,000 for the three months ended January 31, 2005, compared with the three months ended January 31, 2004.

Net sales increased by $16,933,000, or 21.7%, to $94,878,000 for the six months ended January 31, 2005, from $77,945,000 for the six months ended January 31, 2004. Net sales contributed by Saf-T-Pak for the six months ended January 31, 2005 were $2,285,000. Net sales of the Company’s pre-existing business increased by $14,648,000, or 18.8%, to $92,593,000 for the six months ended January 31, 2005, compared with the six months ended January 31, 2004.

Net sales were positively impacted for the three and six months ended January 31, 2005, compared with the three and six months ended January 31, 2004, by approximately $1,360,000 and $2,225,000, respectively, due to the translation of Carsen’s and Biolab’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 and Scientific segments. Biolab’s net sales

are included in the Water Treatment segment.

In addition, net sales were positively impacted for the three and six months ended January 31, 2005, compared with the three and six months ended January 31, 2004, by approximately $301,000 and $518,000, respectively, due to the translation of Minntech’s Netherlands subsidiary net sales using a stronger euro against the United States dollar. The majority of the net sales of Minntech’s Netherlands subsidiary are included in the Dialysis segment.

Increases in selling prices of the Company’s products did not have a significant effect on net sales for the three and six months ended January 31, 2005.

The increase in net sales of the Company’s pre-existing business for the three and six months ended January 31, 2005 was attributable to increases in sales of dialysis products, endoscopy and surgical products, endoscope reprocessing products, filtration and separation products and scientific products.

Sales of dialysis products and services increased by 10.0% and 11.7% for the three and six months ended January 31, 2005, respectively, compared with the three and six months ended January 31, 2004, primarily due to an increase in customer demand for concentrate (a concentrated acid used to prepare dialysate, a chemical solution that draws waste products from a patient’s blood through a dialyzer membrane during hemodialysis treatment) to several major U.S. dialysis chains and to an international customer, and an increase in demand for dialyzer reuse supplies. Partially offsetting the increase in sales were lower selling prices for the Company’s Renalin (sterilant) product due to customer mix; however, such lower selling prices were partially offset by increased customer demand for Renalin.

The increase in sales of endoscopy and surgical products and services was primarily due to improved healthcare funding in Canada, the translation of Carsen’s net sales using a stronger Canadian dollar against the United States dollar, enhanced offerings of surgical products and the effect of reorganizing the sales force. Net sales of endoscopy and surgical products and services increased by 22.8% and 14.7% in U.S. dollars, and increased by 13.6% and 6.6% in their functional Canadian currency, during the three and six months ended January 31, 2005, respectively, compared with the three and six months ended January 31, 2004. The increase during the six months ended January 31, 2005 is being compared to the six months ended January 31, 2004 which included strong sales volume during the three months ended October 31, 2003 as a result of the decrease in cases of severe acute respiratory syndrome (“SARS”) in the greater Toronto area which allowed the Company’s sales personnel to once again begin visiting hospitals. Healthcare funding in Canada is dependent upon governmental appropriations. During the past year, Canada adopted a budget that provides for a significant increase in funding for healthcare. However, the Company cannot ascertain what impact the funding situation or Canada’s budget will have on future sales of endoscopy and surgical products.

The increase in sales of endoscope reprocessing products and service of 21.1% and 23.5% for the three and six months ended January 31, 2005, respectively, compared with the three and six months ended January 31, 2004, was primarily due to an increase in customer demand for endoscope disinfection equipment, disinfectants (including the Company’s new Adaspor product in Europe) and related consumables both in the United States and internationally, and an increase in product service due to the increased field population of equipment.

The increase in sales of filtration and separation products of 35.5% and 21.3% for the three and six months ended January 31, 2005, respectively, compared with the three and six months ended January 31, 2004, was primarily due to an increase in customer demand in the United States and internationally for the Company’s industrial water and air filter products, international sales of the Company’s new Minncare dry fog disinfection system, domestic sales of the Company’s pediatric filters and an increase in demand in the United States during the three months ended January 31, 2005 for the Company’s hemoconcentrator product (a device used to concentrate red blood cells and remove excess fluid from the bloodstream during open-heart surgery).

Sales in the All Other reportable segment increased 90.8% and 158.4% for the three and six months ended January 31, 2005, respectively, as compared with the three and six months ended January 31, 2004. Net sales contributed by the Specialty Packaging operating segment for the three and six months ended January 31, 2005 were $1,060,000 and $2,285,000, respectively. Net sales contributed by the Scientific operating segment were $4,032,000 and $9,216,000, an increase of $1,363,000 and $4,766,000, or 51.1% and 107.1%, for the three and six months ended January 31, 2005, respectively, compared with the three and six months ended January 31, 2004. The increase in sales of scientific products for the three and six months ended January 31, 2005 was primarily due to the introduction of a new confocal microscope, increased demand in Canada for scientific and industrial microscopes and related imaging products and improved government funding of research in Canada. The increase in sales for the six months ended January 31, 2005 was also due to a large sale of microscopes and related imaging products to a Canadian university during the three months ended October 31, 2004.

Gross profit increased by $3,702,000, or 24.5%, to $18,821,000 for the three months ended January 31, 2005, from $15,119,000 for the three months ended January 31, 2004. Gross profit of the Company’s pre-existing business increased by $3,128,000, or 20.7%, to $18,247,000 for the three months ended January 31, 2005, compared with the three months ended January 31, 2004. Gross profit contributed by Saf-T-Pak for the three months ended January 31, 2005 was $574,000.

Gross profit increased by $7,744,000, or 27.4%, to $36,036,000 for the six months ended January 31, 2005, from $28,292,000 for the six months ended January 31, 2004. Gross profit of the Company’s pre-existing business increased by $6,445,000, or 22.8%, to $34,737,000 for the six months ended January 31, 2005, compared with the six months ended January 31, 2004. Gross profit contributed by

Saf-T-Pak for the six months ended January 31, 2005 was $1,299,000.

Gross profit as a percentage of net sales for the three months ended January 31, 2005 and 2004 were 38.0% and 36.8%, respectively. Gross profit as a percentage of net sales of the Company’s pre-existing business for the three months ended January 31, 2005 was 37.6%. Gross profit as a percentage of net sales for Saf-T-Pak for the three months ended January 31, 2005 was 54.2%.

Gross profit as a percentage of net sales for the six months ended January 31, 2005 and 2004 were 38.0% and 36.3%, respectively. Gross profit as a percentage of net sales of the Company’s pre-existing business for the six months ended January 31, 2005 was 37.5%. Gross profit as a percentage of net sales for Saf-T-Pak for the six months ended January 31, 2005 was 56.8%.

The higher gross profit percentage from the Company’s pre-existing business for the three and six months ended January 31, 2005, compared with the three and six months ended January 31, 2004, was primarily attributable to favorable sales mix in the Company’s endoscope reprocessing and filtration and separation operating segments, favorable Canadian dollar exchange rates which principally impact the endoscopy and surgical, water treatment and scientific operating segments and improved overhead absorption in the Company’s endoscope reprocessing and filtration and separation businesses due to increases in sales volume. Partially offsetting these increases to gross profit percentage were a lower gross profit percentage on the Company’s dialysis products and, during the three months ended January 31, 2005, endoscopy and surgical products due to sales mix.

The favorable Canadian dollar exchange rates lowered Carsen’s and Biolab’s cost of inventory purchased from suppliers in the United States, and therefore decreased cost of sales and increased gross profit, by approximately $597,000 and $1,179,000 for the three and six months ended January 31, 2005, respectively, compared with the three and six months ended January 31, 2004. In addition, gross profit was positively impacted for the three and six months ended January 31, 2005, compared with the three and six months ended January 31, 2004, by approximately $502,000 and $789,000, respectively, due to the translation of Carsen’s and Biolab’s gross profit using a stronger Canadian dollar against the United States dollar (which also impacts net sales and therefore has no impact on gross profit as a percentage of net sales). Similarly, gross profit was positively impacted for the three and six months ended January 31, 2005, compared with the three and six months ended January 31, 2004, by approximately $53,000 and $107,000, respectively, due to the translation of Minntech’s Netherlands subsidiary gross profit using a stronger euro against the United States dollar.

Selling expenses increased by $813,000 to $5,814,000 for the three months ended January 31, 2005, from $5,001,000 for the three months ended January 31, 2004. For the six months ended January 31, 2005, selling expenses increased by $1,521,000 to $11,222,000, from $9,701,000 for the six months ended January 31, 2004. For the three and six months ended January 31, 2005, selling expenses increased principally due to the inclusion of Saf-T-Pak; increases in

commissions and incentive compensation due to improved operating results; the translation of Carsen’s and Biolab’s expenses using a stronger Canadian dollar against the United States dollar; and the addition of sales representatives and management personnel in the Endoscopy and Surgical segment.

Selling expenses as a percentage of net sales were 11.7% and 11.8% for the three and six months ended January 31, 2005, respectively, compared with 12.2% and 12.4% for the three and six months ended January 31, 2004. The decrease in selling expenses as a percentage of net sales was primarily attributable to the favorable impact of increased net sales against the fixed component of selling expenses, partially offset by an increase in incentive compensation and the addition of sales representatives and management personnel in the Endoscopy and Surgical segment.

General and administrative expenses increased by $967,000 to $5,367,000 for the three months ended January 31, 2005, from $4,400,000 for the three months ended January 31, 2004. For the six months ended January 31, 2005, general and administrative expenses increased by $2,243,000 to $10,817,000, from $8,574,000 for the six months ended January 31, 2004. For the three and six months ended January 31, 2005, general and administrative expenses increased principally due to an increase in incentive compensation; the inclusion of Saf-T-Pak; increased accounting and consulting costs relating to corporate governance; additional executive personnel; increases in foreign exchange losses associated with translating certain foreign denominated assets into functional currencies; the translation of Carsen’s and Biolab’s expenses using a stronger Canadian dollar against the United States dollar; and increases in the cost of commercial insurance.

General and administrative expenses as a percentage of net sales were 10.8% and 11.4% for the three and six months ended January 31, 2005, respectively, compared with 10.7% and 11.0% for the three and six months ended January 31, 2004.

Research and development expenses (which include continuing engineering costs) decreased by $81,000 to $1,022,000 for the three months ended January 31, 2005, from $1,103,000 for the three months ended January 31, 2004. For the six months ended January 31, 2005, research and development expenses decreased by $167,000 to $2,006,000, from $2,173,000 for the six months ended January 31, 2004. The majority of research and development expenses for the three and six months ended January 31, 2005 and 2004 related to the Dyped endoscope reprocessor.

Interest expense decreased by $53,000 to $420,000 for the three months ended January 31, 2005, from $473,000 for the three months ended January 31, 2004. For the six months ended January 31, 2005, interest expense decreased by $76,000 to $849,000, from $925,000 for the six months ended January 31, 2004. For the three and six months ended January 31, 2005, interest expense decreased primarily due to the decrease in average outstanding borrowings, partially offset by an increase in average interest rates. Interest income increased by

$65,000 to $107,000 for the three months ended January 31, 2005, from $42,000 for the three months ended January 31, 2004. For the six months ended January 31, 2005, interest income increased by $120,000 to $185,000, from $65,000 for the six months ended January 31, 2004. For the three and six months ended January 31, 2005, interest income increased primarily due to an increase in cash available for short-term investments.

Income before income taxes increased by $2,106,000 to $6,305,000 for the three months ended January 31, 2005, from $4,199,000 for the three months ended January 31, 2004. For the six months ended January 31, 2005, income before income taxes increased by $4,314,000 to $11,327,000, from $7,013,000 for the six months ended January 31, 2004.

The Company’s results of operations for the three and six months ended January 31, 2005 and 2004 also reflect income tax expense for its international subsidiaries at their respective statutory rates. Such international subsidiaries include the Company’s subsidiaries in Canada and Japan, which had effective tax rates during the six months ended January 31, 2005 of approximately 35.3% and 45.0%, respectively. The higher overall effective tax rate for the six months ended January 31, 2005, as compared with the six months ended January 31, 2004, is principally due to the geographic mix of pretax income and the loss from operations at the Company’s Netherlands subsidiary for which no tax benefit was recorded.

Liquidity and Capital Resources

At January 31, 2005, the Company’s working capital was $53,411,000, compared with $46,735,000 at July 31, 2004. This increase in working capital was primarily due to the increase in cash, as described below, as well as the translation of net assets of the Company’s Canadian subsidiaries using a stronger Canadian dollar against the United States dollar.

Net cash provided by operating activities was $7,997,000 and $3,966,000 for the six months ended January 31, 2005 and 2004, respectively. For the six months ended January 31, 2005, the net cash provided by operating activities was primarily due to net income, after adjusting for depreciation and amortization, deferred income taxes, and a decrease in inventories (which was primarily due to a large sale of microscopes and related imaging products to a Canadian university), partially offset by a decrease in accounts payable and accrued expenses and income taxes payable due to the timing associated with payments. For the six months ended January 31, 2004, the net cash provided by operating activities was primarily due to net income, after adjusting for depreciation and amortization, partially offset by a decrease in accounts payable and accrued

expenses due to the timing associated with payments, and an increase in prepaid expenses and other current assets.

Net cash used in investing activities was $1,866,000 and $17,659,000 for the six months ended January 31, 2005 and 2004, respectively. For the six months ended January 31, 2005, the net cash used in investing activities was primarily for capital expenditures. For the six months ended January 31, 2004, the net cash used in investing activities was primarily for the acquisitions of Biolab, Mar Cor and Dyped.

Net cash used in financing activities was $3,445,000 for the six months ended January 31, 2005, compared with net cash provided by financing activities of $5,667,000 for the six months ended January 31, 2004. For the six months ended January 31, 2005, the net cash used in financing activities was primarily attributable to repayments under the Company’s credit facilities, partially offset by exercises of stock options. For the six months ended January 31, 2004, the net cash provided by financing activities was primarily attributable to borrowings under the Company’s credit facilities related to the acquisition of Mar Cor, partially offset by repayments under the credit facilities.

The Company’s 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”), (ii) a $17,500,000 senior secured revolving credit facility from the U.S. lenders (the “U.S. Revolving Credit Facility”) 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”) (the Term Loan Facility and the U.S. Revolving Credit Facility are collectively referred to as the “U.S. Credit Facilities”), and (iii) a $6,000,000 (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 (the U.S. Credit Facilities and the Canadian Revolving Credit Facility are collectively referred to as the “Credit Facilities”).

For the six months ended January 31, 2005, borrowings under the Credit Facilities bore 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”).

On February 17, 2005, the Company amended its U.S. Credit Facilities as follows: (i) the margins applicable to the Company’s outstanding borrowings were decreased to zero to 0.50% above the lenders’ base rate and 1.00% to 1.75% above LIBOR, depending upon the Company’s consolidated ratio of debt to EBITDA, (ii) the maximum allowed consideration paid for an acquisition was increased from $5,000,0000 to $25,000,000, (iii) a feature was added that gives the Company the ability to increase the U.S. Revolving Credit Facility from $17,500,000 up to $40,000,000 at any time on or before the U.S

Revolving Credit Facility’s termination date upon mutual agreement from the lenders and the Company, (iv) certain financial covenants were modified to allow for the potential increased borrowings and capital expenditures, (v) fees on the unused portion of the U.S. Revolving Credit Facility were decreased to rates ranging from .20% to .35%, depending upon the Company’s consolidated ratio of debt to EBITDA, and (vi) the requirement that determined the available borrowings under the U.S. Revolving Credit Facility, which was based upon percentages of the eligible accounts receivable and inventories of Cantel, Minntech and Mar Cor, was eliminated.

Therefore, the margins applicable to the Company’s outstanding borrowings decreased on February 17, 2005 to the lenders’ base rate and 1.00% above LIBOR. The base rates associated with the U.S. lenders and the Canadian lender were 5.50% and 4.25%, respectively, at February 28, 2005, and the LIBOR rates ranged from 2.27% to 2.96% at February 28, 2005. At February 28, 2005, all of the Company’s outstanding borrowings were under LIBOR contracts.

At January 31, 2005, aggregate annual required maturities of the Term Loan Facility are as follows:

Six month period ending July 31, 2005	$	1,500,000
Fiscal 2006	5,000,000
Fiscal 2007	6,000,000
Fiscal 2008	6,750,000
Total	$	19,250,000

In conjunction with the Dyped acquisition on September 12, 2003, the Company issued a note with a face value of €1,350,000

($1,505,000 using the exchange rate on the date of the acquisition). At January 31, 2005, approximately $1,596,000 of this note was outstanding using the exchange rate on January 31, 2005. Such note is non-interest bearing and has been recorded at its present value of $1,387,000 at January 31, 2005. The current portion of this note is recorded in accrued expenses and the remainder is recorded in other long-term liabilities.

Also included in other long-term liabilities are deferred compensation arrangements for certain former Minntech directors and officers.

Aggregate future minimum commitments at January 31, 2005 under noncancelable operating leases for property and equipment are as follows:

Six month period ending July 31, 2005	$		1,070,000
Fiscal 2006	1,430,000
Fiscal 2007	1,025,000
Fiscal 2008	771,000
Fiscal 2009	709,000
Thereafter	1,805,000
Total lease commitments	$	6,810,000

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. Under the Olympus Agreement, Carsen is subject to minimum purchase requirements of $20,600,000 and $23,500,000 for the contract years ending March 31, 2005 and 2006, respectively, which Carsen expects to meet. There are no minimum purchase requirements under the Olympus Industrial Agreement. Both agreements expire on March 31, 2006.

Effective August 1, 2003, Minntech renewed its distribution agreement with Olympus (the “MediVators Agreement”) which 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. Failure by Olympus to achieve the minimum purchase projections in any contract year gives Minntech the option to terminate the MediVators Agreement. The MediVators Agreement expires on August 1, 2006. Despite the fact that Olympus historically has not achieved the minimum purchase projections, the Company has elected not to terminate or significantly restructure the MediVators Agreement because the Company believes that Olympus’ existing domestic distribution capabilities continue to provide the Company with the broadest distribution and profit potential for its endoscope reprocessing products.

The Company has determined that it will repatriate minimal amounts of existing and future accumulated profits from its international locations until existing domestic NOLs are exhausted,

which the Company estimates to be no earlier than the end of fiscal 2005. Notwithstanding this strategy, the Company believes that its current cash position, anticipated cash flows from 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 February 28, 2005, approximately $23,500,000 was available under the revolving credit facilities, of which $17,500,000 was available for its United States operations.

During the three and six months ended January 31, 2005, compared with the three and six months ended January 31, 2004, the average value of the Canadian dollar increased by approximately 8.3% and 7.4%, 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 principally for the following reasons: (i) Carsen purchases substantially all of its products in United States dollars and sells its products in Canadian dollars, (ii) Biolab and Saf-T-Pak purchase a portion of their inventories in United States dollars and sell a significant amount of their products in United States dollars and therefore are exposed to foreign currency gains and losses upon payment of such payables and the collection of such receivables, and (iii) the results of operations of the Company’s Canadian subsidiaries are translated from their functional Canadian currency to United States dollars. During the three and six months ended January 31, 2005, compared with the three and six months ended January 31, 2004, such strengthening of the Canadian dollar relative to the United States dollar had an overall positive impact upon the Company’s results of operations.

Under the Canadian Revolving Credit Facility, Carsen has a $35,000,000 (United States dollars) foreign currency hedging facility, as amended, 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 $23,300,000 (United States dollars) at February 28, 2005 and cover a portion of the Canadian subsidiary’s projected purchases of inventories through July 2006. These foreign currency forward contracts have been designated as cash flow hedge instruments. The weighted average exchange rate of the forward contracts open at February 28, 2005 was $1.2867 Canadian dollar per United States dollar, or $.7772 United States dollar per Canadian dollar. The exchange rate published by the Wall Street Journal on February 28, 2005 was $1.2332 Canadian dollar per United States dollar, or $.8109 United States dollar per Canadian dollar.

During the three and six months ended January 31, 2005, compared with the three and six months ended January 31, 2004, the value of the euro increased by approximately 8.2% and 8.3%, 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 principally for the following reasons: (i) 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, and (ii) the results of operations of Minntech’s Netherlands subsidiary are translated from its functional euro

currency to United States dollars. During the three and six months ended January 31, 2005, such strengthening of the euro relative to the United States dollar had an overall adverse impact upon the Company’s 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, which contracts are generally one month in duration. These short-term contracts have been designated as fair value hedges. There was one foreign currency forward contract amounting to €3,391,000 at February 28, 2005 which covers certain assets and liabilities of Minntech’s Netherlands subsidiary which are denominated in United States dollars. Such contract expires on March 31, 2005. Under its Credit Facilities, such contracts to purchase euros may not exceed $12,000,000 in an aggregate notional amount at any time. During the three and six months ended January 31, 2005, such forward contracts were effective in offsetting the adverse impact of the strengthening of the euro on the Company’s results of operations.

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 are immediately realized within general and administrative expenses due to the short-term nature of such contracts.

For purposes of translating the balance sheet, at January 31, 2005 compared with July 31, 2004, the value of the Canadian dollar and the value of the euro increased by approximately 7.1% and 8.2%, respectively, compared to the value of the United States dollar. The total of these currency movements resulted in a foreign currency translation gain of $2,748,000 for the six months ended January 31, 2005, thereby increasing stockholders’ equity.

Changes in the value of the Japanese yen relative to the United States dollar during the three and six months ended January 31, 2005 and 2004 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, net income and net assets.

Inflation has not significantly impacted the Company’s operations.

Critical Accounting Policies

The Company’s discussion and analysis of its financial

condition and results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company continually evaluates its estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its condensed consolidated financial statements.

Revenue Recognition

Revenue on product sales (excluding certain sales of endoscope reprocessing equipment in the United States) is recognized as products are shipped to customers and title passes. The passing of title is determined based upon the FOB terms specified for each shipment. With respect to dialysis, filtration and separation, packaging and a portion of endoscope reprocessing products, shipment terms are generally FOB origin for common carrier and FOB destination when the Company’s distribution fleet is utilized. With respect to endoscopy and surgical, water treatment and scientific products, shipment terms may be either FOB origin or destination. Customer acceptance for the majority of the Company’s product sales occurs at the time of delivery. In certain instances, primarily with respect to some of the Company’s water treatment products and an insignificant amount of the Company’s sales of dialysis equipment and scientific products, post-delivery obligations such as installation, in-servicing or training are contractually specified; in such instances, revenue recognition is deferred until all of such conditions have been substantially fulfilled such that the products are deemed functional by the end-user. With respect to a portion of endoscopy and surgical, water treatment and scientific product sales, equipment is sold as part of a system for which the equipment is functionally interdependent or the customer’s purchase order specifies “ship-complete” as a condition of delivery; revenue recognition on such sales is deferred until all equipment has been delivered.

With respect to a portion of endoscopy and surgical sales, the Company enters into arrangements whereby revenue is immediately recognized upon the transfer of equipment to customers who pay on a cost per procedure basis, subject to minimum monthly payments. Such arrangements are non-cancelable by the customer and provide for a bargain purchase option by the customer at the conclusion of the term. All direct costs related to these transactions are recorded at the time of revenue recognition. Some of such transactions also provide for future servicing of the equipment, which service revenue component is deferred and recognized over the period that such services are provided. With respect to these multiple element

arrangements, revenue is allocated to the equipment and service components based upon vendor specific objective evidence which principally includes comparable historical transactions of similar equipment and service sold as stand-alone components.

Sales of a majority of the Company’s endoscope reprocessing equipment to a third party distributor in the United States are recognized on a bill and hold basis. Such sales satisfy each of the following criteria: (i) the risks of ownership have passed to the third party distributor; (ii) the third party distributor must provide a written purchase order committing to the purchase of specified units; (iii) the bill and hold arrangement was specifically requested by the third party distributor for the purpose of minimizing the impact of multiple shipments of the units; (iv) the third party distributor provides specific instructions for shipment to customers, and completed units held by the Company for the third party distributor generally do not exceed three months of anticipated shipments; (v) the Company has no further performance obligations with respect to such units; (vi) completed units are invoiced to the third party distributor with 30 day payment terms and such receivables are generally satisfied within such terms; and (vii) completed units are ready for shipment and segregated in a designated section of the Company’s warehouse reserved only for the third party distributor.

Revenue on service sales is recognized when repairs are completed at the customer’s location or when repairs are completed at the Company’s facilities and the products are shipped to customers. All shipping and handling fees invoiced to customers, such as freight, are recorded as revenue (and related costs are included within cost of sales) at the time the sale is recognized.

None of the Company’s sales, including the bill and hold sales arrangement, contain right-of-return provisions, and customer claims for credit or return due to damage, defect, shortage or other reason must be pre-approved by the Company before credit is issued or such product is accepted for return. No cash discounts for early payment are offered except with respect to a small portion of the Company’s sales of dialysis products and certain prepaid packaging products. Price protection is not offered by the Company, although advance pricing contracts or required notice periods prior to implementation of price increases exist for certain customers with respect to many of the Company’s products. With respect to certain of the Company’s dialysis and endoscope reprocessing customers, volume rebates and trade-in allowances are provided; such volume rebates and trade-in allowances are provided for as a reduction of sales at the time of revenue recognition and amounted to $266,000 and $457,000 for the three and six months ended January 31, 2005, respectively, and $189,000 and $286,000 for the three and six months ended January 31, 2004, respectively. Such allowances are determined based on estimated projections of sales volume and trade-ins for the entire rebate agreement periods. The increase in rebates for the three and six months ended January 31, 2005, compared with the three and six months ended January 31, 2004, is primarily due to an increase in sales volume to several major U.S. dialysis chains and additional rebate agreements for the Company’s Renalin 100 (sterilant) product, partially offset by the expiration of a rebate agreement for the

Company’s endoscope reprocessing equipment. Trade-in allowances were not significant during the three and six months ended January 31, 2005. If it becomes known that sales volume to customers will deviate from original projections, the volume rebate provisions originally established would be adjusted accordingly.

The majority of the Company’s dialysis products and services are sold to end-users; the majority of filtration and separation products and endoscope reprocessing products and services are sold to third party distributors; the majority of endoscopy and surgical products and services are sold directly to hospitals; the majority of water treatment products and services are sold to hospitals, dialysis clinics, pharmaceutical and biotechnology companies and other end-users; scientific products and services are sold to hospitals, laboratories and other end-users; and packaging products are sold to third-party distributors, medical research companies, laboratories, pharmaceutical companies, hospitals, government agencies and other end-users. Sales to all of these customers follow the Company’s revenue recognition policies.

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. While actual losses have historically been within management’s expectations and provisions established, 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. In one such evaluation in fiscal 2003, the Company determined that certain parts relating to the Company’s endoscope reprocessing equipment were obsolete, primarily due to design changes, resulting in an additional provision of approximately $300,000. With few exceptions, the saleable value of the Company’s inventories has historically been within management’s expectation and provisions established, however, rapid changes in the market due to competition, technology and various other factors could have an adverse effect on the saleable value of the Company’s inventories, resulting in the need for additional reserves.

Goodwill and Intangible Assets

Certain of the Company’s identifiable intangible assets,

including technology, customer relationships, patents and non-compete agreements, are amortized on the straight-line method over their estimated useful lives which range from 3 to 20 years. Additionally, the Company has recorded goodwill and trademarks and tradenames, all of which have indefinite useful lives and are therefore not amortized. All of the Company’s intangible assets and goodwill are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and goodwill and intangible assets with indefinite lives are reviewed for impairment at least annually. The Company’s management is primarily responsible for determining if impairment exists and considers a number of factors, including third-party valuations, when making these determinations. In performing a review for goodwill impairment, management uses a two-step process that begins with an estimation of the fair value of the related operating segments. The first step is a review for potential impairment, and the second step measures the amount of impairment, if any. In performing its annual review for indefinite lived intangibles, management compares the current fair value of such assets to their carrying values. With respect to amortizable intangible assets when impairment indicators are present, management would determine whether non-discounted cash flows would be sufficient to recover the carrying value of the assets; if not, the carrying value of the assets would be adjusted to their fair value. On July 31, 2004, management concluded that none of the Company’s intangible assets or goodwill was impaired since the individual fair values exceeded their carrying values. While the results of these annual reviews have historically not indicated impairment, impairment reviews are highly dependent on management’s projections of future operating results of the Company which management believes to be reasonable.

Warranties

The Company provides for estimated costs that may be incurred to remedy deficiencies of quality or performance of the Company’s products at the time of revenue recognition. Most of the Company’s products have a one year warranty, although a majority of the Company’s endoscope reprocessing equipment in the United States may carry a warranty period of up to fifteen months. The Company records provisions for product warranties as a component of cost of sales based upon 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. In one such review during fiscal 2003, the Company’s results of operations were adversely impacted by an additional charge of approximately $570,000 related to endoscope reprocessing equipment due to a component failure which required warranty service to many endoscope reprocessing units in the field. Management believes this situation was fully remedied in fiscal 2003.

Income Taxes

The Company recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis 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, if necessary, 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 such amounts are appropriately stated. Such a review considers known future changes in various effective tax rates, principally in the United States. If the United States effective tax rate were to change in the future, the Company’s items of deferred tax could be materially affected. All of such evaluations require significant management judgments.

It is the Company’s policy to establish reserves for possible exposures as a result of an examination by tax authorities. The Company establishes the reserves based primarily upon management’s assessment of exposure associated with acquired companies and permanent tax differences. The tax reserves are analyzed periodically (at least annually) and adjustments are made, as events occur to warrant adjustment to the reserves. The majority of the Company’s income tax reserves originated from acquisitions; therefore, changes to such reserves, if any, would be adjusted through goodwill.

Business Combinations

Acquisitions require significant estimates and judgments related to the fair value of assets acquired and liabilities assumed.

Certain liabilities are subjective in nature. The Company reflects such liabilities based upon the most recent information available. In conjunction with the Company’s acquisitions, such subjective liabilities principally include certain income tax and sales and use tax exposures, including 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 recorded.

Other Matters

The Company does not have any off balance sheet financial arrangements.

Forward Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements that set forth anticipated results based on management’s plans and assumptions. From time to time, the Company also provides forward-looking statements in other materials released to the public as well as oral forward-looking statements. These statements are based on current expectations, estimates, or forecasts about the industries in which the Company operates and the beliefs and assumptions of management; they do not relate strictly to historical or current facts. The Company has tried, wherever possible, to identify such statements by using words such as “expect,” “anticipate,” “goal,” “project,” “intend,” “plan,” “believe,” “seek,” “will,” “may,” “could,” and variations of such words and similar expressions. In addition, any statements that refer to predictions or projections of the Company’s future financial performance, anticipated growth and trends in the Company’s businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions about future events, activities or developments and are subject to numerous risks, uncertainties, and assumptions that are difficult to predict including, among other things, the following:

• 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

• the ability to keep pace with technological advances

• the relationships with key suppliers and key customers

• foreign currency and interest rate risks

• changes in global or local economic conditions

• changes in government regulation affecting the Company’s businesses

Readers should understand that it is not possible to predict or identify all such factors. Consequently, readers should not consider the foregoing items to be a complete list of all potential risks or uncertainties.

All forward-looking statements herein speak only as of the date of this Form 10-Q. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in the Company’s

expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Foreign currency market risk: A portion of the Company’s products are imported from the Far East and Western Europe, Minntech 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 affected by the imposition of trade barriers, fluctuations in the rates of exchange of various currencies, tariff increases and import and export restrictions, affecting the United States, Canada and The Netherlands.

Carsen imports a substantial portion of its products from the United States and pays for such products in United States dollars. Additionally, a portion of Biolab’s and Saf-T-Pak’s inventories are purchased in the United States and a significant amount of their sales are to customers in the United States. Carsen’s, Biolab’s and Saf-T-Pak’s businesses could be materially and adversely affected by the imposition of trade barriers, fluctuations in the rates of exchange of various currencies, tariff increases and import and export restrictions between the United States and Canada. Additionally, Carsen’s, including its Biolab subsidiary, and Saf-T-Pak’s financial statements are translated using the accounting policies described in note 2 to the Consolidated Financial Statements included within the Company’s 2004 Form 10-K. Fluctuations in the rates of currency exchange between the United States and Canada had an overall positive impact for the three and six months ended January 31, 2005, compared with the three and six months ended January 31, 2004, upon the Company’s results of operations and 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 $24,400,000 (United States dollars) at January 31, 2005 and cover a portion of Carsen’s projected purchases of inventories through July 2006.

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 2004 Form 10-K. Fluctuations in the rates of currency exchange between the European Union and the United States had an overall adverse impact for the three and six months ended January 31, 2005, compared with the three and six months ended January 31, 2004, 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, which contracts are generally one month in duration. These short-term contracts have been designated as fair value hedge instruments. There was no such foreign currency forward contract at January 31, 2005; however, one contract amounting to €3,156,000 was entered into on February 1, 2005 which covers certain assets and liabilities of Minntech’s Netherlands subsidiary which are denominated in United States dollars. Such contract expired on February 28, 2005. Under its credit facilities, such contracts to purchase euros may not exceed $12,000,000 in an aggregate notional amount at any time. During the three and six months ended January 31, 2005, such forward contracts were effective in offsetting the adverse impact of the strengthening of the euro on the Company’s results of operations.

The functional currency of Minntech’s Japan subsidiary is the Japanese yen. Changes in the value of the Japanese yen relative to the United States dollar during the three and six months ended January 31, 2005 and 2004 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, net income and net assets.

Interest rate market risk: The Company has two credit facilities for which the interest rate on outstanding borrowings is variable. Therefore, interest expense is principally affected by the general level of interest rates in the United States and Canada. During the three and six months ended January 31, 2005, all of the Company’s outstanding borrowings were under its United States credit facilities.

Additional information related to market risk sensitive transactions is contained in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Company’s 2004 Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES.

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) 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 Securities and Exchange Commission and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

The Company, under the supervision and with the participation of its Chief Executive Officer and its Chief Financial Officer, carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer each concluded that the Company’s disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by the Company in reports that it files under the Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission.

The Company has evaluated its internal controls over financial reporting and determined that no changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Part I, Item 1. – Note 13 above.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The Company did not issue or purchase any unregistered equity securities during the three and six months ended January 31, 2005.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

On December 16, 2004, the Company held its Annual Meeting of Stockholders for the fiscal year ended July 31, 2004 to re-elect Charles M. Diker, Alan J. Hirschfield, and Bruce Slovin as directors of the Company, to hold office until the Annual Meeting of Stockholders to be held after the fiscal year ending July 31, 2007. 13,449,498 votes were cast for and 429,905 votes were withheld in the election of Mr. Diker. 13,393,716 votes were cast for and 485,687 votes were withheld in the election of Mr. Hirschfield. 13,449,312 votes were cast for and 430,091 votes were withheld in the election of Mr. Slovin.

Stockholders also approved an amendment to the Company’s 1997 Employee Stock Option Plan to increase the number of shares reserved for issuance and available for grant thereunder from 3,000,000 to 3,750,000. 5,990,334 votes were cast for, 4,081,394 votes were against, and 10,857 votes abstained in the approval of the amendment to the Company’s 1997 Employee Stock Option Plan.

Stockholders also ratified the selection of Ernst & Young LLP as the independent registered public accounting firm of the Company for its fiscal year ending July 31, 2005. 13,749,950 votes were cast for, 126,198 votes were against, and 3,255 votes abstained such ratification.

The above shares and votes have been retroactively adjusted to reflect the January 2005 three-for-two stock split.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

10(a)	–	Third Amendment to Credit Agreement among Cantel Medical Corp., the Banks, Financial Institutions and Other Institutional Lenders named therein, Fleet National Bank and PNC Bank, National Association dated as of February 17, 2005.

31.1	–	Certification of Principal Executive Officer.

31.2	–	Certification of Principal Financial Officer.

32	–	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CANTEL MEDICAL CORP.

Date: March 14, 2005


	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)


	By:		/s/ Steven C. Anaya
		Steven C. Anaya,
		Vice President and Controller