SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
/X/ Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended January 31, 2001.
or
/ / Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from
_____ to _____.
Commission file number: 0-6132
CANTEL MEDICAL CORP.
--------------------
(Exact name of registrant as specified in its charter)
DELAWARE 22-1760285
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
150 CLOVE ROAD, LITTLE FALLS, NEW JERSEY 07424
- ---------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code
(973) 890-7220
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Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes |X| No |_|
Number of shares of Common Stock outstanding as of March 9, 2001: 4,474,812.
PART I - FINANCIAL INFORMATION
CANTEL MEDICAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands, Except Share Data)
(Unaudited)
January 31, July 31,
2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 1,956 $ 2,169
Available-for-sale securities 796 --
Accounts receivable, net 9,191 8,970
Inventories 9,678 6,992
Net assets related to discontinued business 571 3,095
Prepaid expenses and other current assets 480 475
-------- --------
Total current assets 22,672 21,701
Property and equipment, net 914 901
Intangible assets, net 1,272 1,345
Other assets 1,349 1,008
-------- --------
$ 26,207 $ 24,955
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,246 $ 5,054
Compensation payable 882 943
Other accrued expenses 1,252 979
Income taxes 839 594
-------- --------
Total current liabilities 7,219 7,570
Long-term debt -- 125
Deferred income taxes 96 97
Stockholders' equity:
Preferred Stock, par value $1.00 per share;
authorized 1,000,000 shares; none issued -- --
Common Stock, $.10 par value; authorized 12,000,000
shares; January 31 - 4,616,945 shares issued and
4,453,402 shares outstanding; July 31 - 4,597,220
shares issued and 4,438,381 shares outstanding 462 460
Additional capital 19,633 19,502
Retained earnings 1,733 96
Accumulated other comprehensive income:
Unrealized gain on securities 71 --
Unrealized gain on currency hedging 33 --
Cumulative foreign currency translation adjustment (2,194) (2,097)
Treasury Stock, at cost; January 31-
163,543 shares; July 31 -158,839 shares (846) (798)
-------- --------
Total stockholders' equity 18,892 17,163
-------- --------
$ 26,207 $ 24,955
======== ========
See accompanying notes.
CANTEL MEDICAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
January 31, January 31,
2001 2000 2001 2000
-------- -------- -------- --------
Net sales:
Product sales $ 10,922 $ 8,813 $ 18,087 $ 15,698
Product service 1,655 1,312 3,111 2,631
-------- -------- -------- --------
Total net sales 12,577 10,125 21,198 18,329
-------- -------- -------- --------
Cost of sales:
Product sales 6,580 5,548 10,626 9,857
Product service 809 656 1,590 1,440
-------- -------- -------- --------
Total cost of sales 7,389 6,204 12,216 11,297
-------- -------- -------- --------
Gross profit 5,188 3,921 8,982 7,032
Expenses:
Shipping and warehouse 152 139 287 269
Selling 1,459 1,222 2,732 2,401
General and administrative 1,528 1,104 2,608 2,086
Research and development 256 219 455 361
-------- -------- -------- --------
Total operating expenses 3,395 2,684 6,082 5,117
-------- -------- -------- --------
Income from continuing operations
before interest, other
income and income taxes 1,793 1,237 2,900 1,915
Interest (income) expense, net (10) 75 (6) 131
Other income -- -- (7) --
-------- -------- -------- --------
Income from continuing operations
before income taxes 1,803 1,162 2,913 1,784
Income taxes 815 539 1,276 776
-------- -------- -------- --------
Income from continuing operations 988 623 1,637 1,008
(Loss) income from
discontinued operations -- (40) -- 70
-------- -------- -------- --------
Net income $ 988 $ 583 $ 1,637 $ 1,078
======== ======== ======== ========
Earnings (loss) per common share:
Basic:
Continuing operations $ 0.22 $ 0.14 $ 0.37 $ 0.23
Discontinued operations -- (0.01) -- 0.01
-------- -------- -------- --------
Net income $ 0.22 $ 0.13 $ 0.37 $ 0.24
======== ======== ======== ========
Diluted:
Continuing operations $ 0.21 $ 0.14 $ 0.35 $ 0.23
Discontinued operations -- (0.01) -- 0.01
-------- -------- -------- --------
Net income $ 0.21 $ 0.13 $ 0.35 $ 0.24
======== ======== ======== ========
See accompanying notes.
2
CANTEL MEDICAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
(Unaudited)
Six Months Ended
January 31,
2001 2000
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations $ 1,637 $ 1,008
Adjustments to reconcile income from continuing
operations to net cash (used in) provided by
operating activities:
Income from discontinued operations -- 70
Depreciation and amortization of continuing
operations 282 222
Depreciation and amortization of discontinued
operations -- 36
Changes in assets and liabilities:
Accounts receivable (278) 1,178
Inventories (2,722) 70
Prepaid expenses and other current assets 27 17
Accounts payable and accrued expenses (548) (1,350)
Income taxes 248 (389)
------- -------
Net cash (used in) provided by operating activities (1,354) 862
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (225) (245)
Purchases of available-for-sale securities (725) --
Cash provided by (used in) discontinued operations 1,258 (1,370)
Proceeds from transfer of discontinued operations 1,231 --
Other, net (359) (144)
------- -------
Net cash provided by (used in) investing activities 1,180 (1,759)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings under credit facilities (125) 1,001
Proceeds from exercise of stock options 86 8
Purchases of Treasury Stock -- (208)
------- -------
Net cash (used in) provided by financing activities (39) 801
------- -------
Decrease in cash and cash equivalents (213) (96)
Cash and cash equivalents at beginning of period 2,169 534
------- -------
Cash and cash equivalents at end of period $ 1,956 $ 438
======= =======
See accompanying notes.
3
CANTEL MEDICAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and the requirements of Form 10-Q and Rule 10.01 of
Regulation S-X. Accordingly, they do not include certain information and note
disclosures required by generally accepted accounting principles for annual
financial reporting and should be read in conjunction with the consolidated
financial statements and notes thereto included in the Annual Report of Cantel
Medical Corp. (the "Company" or "Cantel") on Form 10-K for the fiscal year ended
July 31, 2000, and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere herein. Cantel has two wholly-owned
subsidiaries, Carsen Group Inc. ("Carsen"), its Canadian subsidiary, and
MediVators, Inc. ("MediVators"), its United States subsidiary.
The unaudited interim financial statements reflect all adjustments 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, 2000 was derived from
the audited consolidated balance sheet of the Company at that date.
Note 2. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No.
130, "REPORTING COMPREHENSIVE INCOME", which establishes standards for the
reporting and disclosure of comprehensive income and its components in the
financial statements. The adoption of this Statement had no impact on the
Company's net income and an insignificant impact on stockholders' equity. The
Company's comprehensive income for the three and six months ended January 31,
2001 and 2000 are set forth in the following table:
Three Months Ended Six Months Ended
January 31, January 31,
----------------------- -------------------------
2001 2000 2001 2000
----------- -------- ----------- ----------
Net income $ 988,000 $583,000 $ 1,637,000 $1,078,000
Other comprehensive income (loss):
Unrealized gain on securities 88,000 -- 71,000 --
Unrealized loss on
currency hedging (122,000) -- (74,000) --
Foreign currency translation 347,000 235,000 (97,000) 505,000
----------- -------- ----------- ----------
Comprehensive income $ 1,301,000 $818,000 $ 1,537,000 $1,583,000
=========== ======== =========== ==========
4
Note 3. HEDGING ACTIVITIES
Effective August 1, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133, as amended, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES" ("SFAS No. 133"). SFAS No. 133 requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not designated as hedges must be adjusted to fair value through earnings. If
the derivative is designated as a hedge, depending on the nature of the hedge,
changes in the fair value of the derivatives will either be offset against the
change in the fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of the change in fair
value of a derivative that is designated as a hedge will be immediately
recognized in earnings.
The Company's Canadian subsidiary purchases and pays for a substantial
portion of its products in United States dollars and is therefore exposed to
fluctuations in the rates of exchange between the United States dollar and
Canadian dollar. In order to hedge against the impact of such currency
fluctuations on the purchases of inventories, Carsen enters into foreign
currency forward contracts on firm purchases of such inventories in United
States dollars. Total commitments for such foreign currency forward contracts
amounted to $3,000,000 (United States dollars) at January 31, 2001 and cover a
portion of Carsen's projected purchases of inventories through July 2001. These
foreign currency forward contracts are designated as hedges, and therefore
recognition of gains and losses is deferred within other comprehensive income
until settlement of the underlying commitments. Realized gains and losses are
recorded within cost of sales upon settlement. The Company does not hold any
derivative financial instruments for speculative or trading purposes.
The adoption of SFAS No. 133 on August 1, 2000 did not have a material
impact on operations; however, it resulted in a $107,000 gain being recorded in
other comprehensive income. Additionally, the fair value of the Company's
derivatives was $33,000 at January 31, 2001, which resulted in the recording of
an unrealized loss of $74,000 during the six months ended January 31, 2001. The
entire January 31, 2001 deferred gain of $33,000 will be recognized in earnings
during fiscal 2001.
Note 4. DISCONTINUED OPERATIONS
On October 6, 2000, Carsen consummated a transaction under an Asset
Purchase Agreement with Olympus America Inc. ("Olympus") pursuant to which
Carsen terminated its consumer products business and sold its inventories of
Olympus consumer products to Olympus. The transaction had an effective date of
July 31, 2000.
5
The purchase price for the inventory was $1,026,000, net of adjustments
related to estimated warranty claims and promotional program expenses payable to
Carsen's customers. Carsen will receive additional consideration from Olympus
under the Purchase Agreement, including amounts related to transition services
provided by Carsen subsequent to July 31, 2000. Such consideration includes (i)
fixed cash amounts aggregating approximately $615,000 and (ii) twelve and
one-half percent (12 1/2%) of Olympus' net sales of consumer products in Canada
in excess of $8,000,000 during the period from August 1, 2000 through March 31,
2001. Approximately $115,000 of the fixed cash amounts were received during the
six months ended January 31, 2001, and the remaining amounts are payable on
various dates through April 30, 2001. Olympus also reimbursed Carsen for certain
expenses related to the termination of Carsen's consumer products business.
The discontinuance of the Consumer Products business has been reflected as
a discontinued operation and is presented separately in the Company's Condensed
Consolidated Financial Statements. The Company's Condensed Consolidated
Statements of Income for the three and six months ended January 31, 2000 and
Condensed Consolidated Statements of Cash Flows for the six months ended January
31, 2000 have been restated to conform to the current year's presentation. For
the three months ended January 31, 2000, the loss from discontinued operations
consisted of a pretax loss of $73,000 less a related income tax benefit of
$33,000. For the six months ended January 31, 2000, the gain from discontinued
operations consisted of pretax income of $125,000 less related income taxes of
$55,000.
The components of net assets related to discontinued business in the
Condensed Consolidated Balance Sheets and the activity during the six months
ended January 31, 2001 are set forth below:
July 31, Cash Received Other Cash January 31,
2000 on Closing Settlements 2001
----------- ----------- ----------- ---------
Trade accounts receivable, net
of allowance for doubtful
accounts of $99,000
at July 31 and
$44,000 at January 31 $ 3,047,000 $ -- $(3,047,000) $ --
Consideration due
under Purchase Agreement 1,989,000 (1,231,000) --
758,000
Inventories 235,000 -- (57,000)
178,000
Accounts payable (1,531,000) -- 1,531,000 --
Accrued expenses:
Customer promotions (332,000) -- 218,000 (114,000)
Compensation and other (313,000) -- 62,000 (251,000)
----------- ----------- ----------- ---------
Net assets related to
discontinued business $ 3,095,000 $(1,231,000) $(1,293,000) $ 571,000
=========== =========== =========== =========
6
Note 5. 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 Six Months Ended
January 31, January 31,
-------------------------- --------------------------
2001 2000 2001 2000
---------- ------------- ---------- -------------
Numerator for basic and diluted
earnings (loss) per common share:
Income from continuing operations $ 988,000 $ 623,000 $1,637,000 $ 1,008,000
Income (loss) from
discontinued operations -- (40,000) -- 70,000
---------- ------------- ---------- -------------
Net income $ 988,000 $ 583,000 $1,637,000 $ 1,078,000
========== ============= ========== =============
Denominator for basic and diluted
earnings (loss) per common share:
Denominator for basic earnings
per common share - weighted
average number of shares
outstanding 4,446,011 4,411,621 4,442,468 4,414,697
Dilutive effect of common stock
equivalents using the treasury
stock method and the average
market price for the period 286,921 57,126 257,485 61,615
---------- ------------- ---------- -------------
Denominator for diluted earnings
per common share - weighted
average number of shares
outstanding and common
stock equivalents 4,732,932 4,468,747 4,699,953 4,476,312
========== ============= ========== =============
Basic earnings (loss) per common share:
Continuing operations $ 0.22 $ 0.14 $ 0.37 $ 0.23
Discontinued operations -- (0.01) -- 0.01
---------- ------------- ---------- -------------
Net income $ 0.22 $ 0.13 $ 0.37 $ 0.24
========== ============= ========== =============
Diluted earnings (loss) per common share:
Continuing operations $ 0.21 $ 0.14 $ 0.35 $ 0.23
Discontinued operations -- (0.01) -- 0.01
---------- ------------- ---------- -------------
Net income $ 0.21 $ 0.13 $ 0.35 $ 0.24
========== ============= ========== =============
7
Note 6. FINANCING ARRANGEMENTS
On February 23, 2001, the Company entered into a credit facility with a
United States bank and a Canadian bank which provides for i) a $2,500,000
revolving credit facility for Cantel and MediVators (the "U.S. Borrowers") (the
"U.S. Revolving Credit Facility") and ii) a $5,000,000 (United States dollars)
revolving credit facility for Carsen (the "Canadian Borrower") (the "Canadian
Revolving Credit Facility"), both of which revolving credit facilities expire on
February 22, 2004, and iii) a $12,500,000 acquisition facility available to the
U.S. Borrowers for permitted acquisitions in the United States through February
22, 2003 (the "Acquisition Facility"). Borrowings under the U.S. Revolving
Credit Facility and the Acquisition Facility will bear interest at rates ranging
from .25% to .75% above the United States lender's base rate, or at rates
ranging from 2% to 3% above the London Interbank Offered Rate ("LIBOR"),
depending upon the U.S. Borrowers' ratio of debt to earnings before interest,
taxes, depreciation and amortization ("EBITDA"). Borrowings under the Canadian
Revolving Credit Facility may be in either Canadian dollars or United States
dollars and will bear interest at rates ranging from .25% to .75% above the
Canadian lender's base rate, or at rates ranging from 2% to 3% above the LIBOR
rate, depending upon the Canadian Borrower's ratio of debt to EBITDA. The base
rates associated with the United States lender and the Canadian lender were
8.50% and 6.75%, respectively, at March 9, 2001. Each of the credit facilities
provides for available borrowings based upon percentages of eligible accounts
receivable and inventories; requires the respective borrower to meet certain
financial covenants; and is secured by substantially all assets of the
respective borrower. In addition, the U.S. Revolving Credit Facility is secured
by the pledge of all of the outstanding shares of MediVators stock owned by
Cantel and the Canadian Revolving Credit Facility is secured by substantially
all assets (including the pledge of 65% of the outstanding shares of Carsen
stock owned by Cantel) of, and is guaranteed by, the U.S. Borrowers.
Note 7. INCOME TAXES
Income taxes consist primarily of taxes imposed on the Company's Canadian
operations. The effective tax rate on Canadian operations was 42.5% and 44.2%
for the six months ended January 31, 2001 and 2000, respectively. For the six
months ended January 31, 2001, the consolidated effective tax rate was higher
than the Canadian effective tax rate due to state income tax expense incurred by
the United States operations, notwithstanding the fact that income generated by
the United States operations is substantially offset by Federal tax benefits
resulting from the utilization of net operating loss carryforwards. For the six
months ended January 31, 2000, the consolidated effective tax rate was lower
than the Canadian effective tax rate due to the fact that income generated by
the United States operations is substantially offset by tax benefits resulting
from the
8
utilization of net operating loss carryforwards for both Federal and state
purposes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF CONTINUING OPERATIONS
Reference is made to the discontinuance of the Company's Consumer Products
business, as more fully described in note 4 to the Condensed Consolidated
Financial Statements. The results of continuing operations reflect primarily the
results of Carsen and MediVators. There was no significant impact upon the
Company's results of operations for the three and six months ended January 31,
2001, compared with the three and six months ended January 31, 2000, as a result
of fluctuations in the rate of exchange between the United States dollar and
Canadian dollar. 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,
2000.
The following table gives information as to the net sales and the
percentage to the total net sales accounted for by each operating segment of the
Company.
Three Months Ended Six Months Ended
January 31, January 31,
-------------------------------------- --------------------------------------
2001 2000 2001 2000
----------------- ----------------- ----------------- -----------------
(Dollar amounts in thousands)
$ % $ % $ % $ %
-------- ---- -------- ---- -------- ---- -------- ----
Medical Products $ 5,664 45.0 $ 4,770 47.1 $ 9,300 43.9 $ 8,026 43.8
Infection Control
Products 3,224 25.6 2,440 24.1 5,543 26.1 4,774 26.0
Scientific Products 2,240 17.8 1,784 17.6 3,571 16.8 3,184 17.4
Product Service 1,655 13.2 1,312 13.0 3,111 14.7 2,631 14.4
Elimination of inter-
company sales of
Infection Control
Products (206) (1.6) (181) (1.8) (327) (1.5) (286) (1.6)
-------- ----- -------- ----- -------- ----- -------- -----
$ 12,577 100.0 $ 10,125 100.0 $ 21,198 100.0 $ 18,329 100.0
======== ===== ======== ===== ======== ===== ======== =====
Net sales increased by $2,452,000, or 24.2%, to $12,577,000 for the three
months ended January 31, 2001, from $10,125,000 for the three months ended
January 31, 2000. Net sales increased by $2,869,000, or 15.7%, to $21,198,000
for the six months ended January 31, 2001, from $18,329,000 for the six months
ended January 31, 2000. These increases were attributable to increased sales in
all of the Company's business segments. The increased sales of Medical Products
was due primarily to an increase in demand, a portion of which was attributable
to the introduction of new flexible endoscopy products, and selling price
increases. The increased sales of Infection Control Products was due primarily
to an increase in demand for consumables, including filters.
9
The increased sales of Scientific Products was primarily attributable to
an increase in demand for microscopes and related imaging equipment. The
increased sales of Product Service was due primarily to an increase in demand
and selling price increases.
Gross profit increased by $1,267,000, or 32.3%, to $5,188,000 for the
three months ended January 31, 2001, from $3,921,000 for the three months ended
January 31, 2000. Gross profit increased by $1,950,000, or 27.7%, to $8,982,000
for the six months ended January 31, 2001, from $7,032,000 for the six months
ended January 31, 2000. Gross profit as a percentage of sales for the three and
six months ended January 31, 2001 were 41.2% and 42.4%, respectively, compared
with 38.7% and 38.4% for the three and six months ended January 31, 2000. The
higher gross profit percentages for the three and six months ended January 31,
2001 were primarily attributable to a buy-in of Medical Products inventories
during fiscal 2000 prior to receiving a supplier price increase, a portion of
which inventories were sold during the three and six months ended January 31,
2001; selling price increases in Medical Products and Product Service; favorable
sales mix associated with Product Service and Scientific Products; and favorable
sales mix and manufacturing efficiencies associated with Infection Control
Products.
Shipping and warehouse expenses increased by $13,000 to $152,000 for the
three months ended January 31, 2001, from $139,000 for the three months ended
January 31, 2000. For the six months ended January 31, 2001, shipping and
warehouse expenses increased by $18,000 to $287,000, from $269,000 for the six
months ended January 31, 2000.
Selling expenses as a percentage of net sales were 11.6% and 12.9% for the
three and six months ended January 31, 2001, compared with 12.1% and 13.1% for
the three and six months ended January 31, 2000. For the three and six months
ended January 31, 2001, the decreases in selling expenses as a percentage of net
sales was primarily attributable to the effect of the increased sales against
the fixed portion of selling expenses and the reduction of commissions as a
percentage of sales at Carsen due to a restructuring of certain compensation
packages.
General and administrative expenses increased by $424,000 to $1,528,000
for the three months ended January 31, 2001, from $1,104,000 for the three
months ended January 31, 2000. For the six months ended January 31, 2001,
general and administrative expenses increased by $522,000 to $2,608,000, from
$2,086,000 for the six months ended January 31, 2000. These increases were
primarily attributable to additional personnel, incentive compensation,
consulting fees, rent, and depreciation and amortization.
Research and development expenses increased by $37,000 to $256,000 for the
three months ended January 31, 2001, from $219,000 for the
10
three months ended January 31, 2000. For the six months ended January 31, 2001,
research and development expenses increased by $94,000 to $455,000, from
$361,000 for the six months ended January 31, 2000. These increases were
primarily attributable to an increase in personnel.
Interest income was $10,000 for the three months ended January 31, 2001,
compared with interest expense of $75,000 for the three months ended January 31,
2000. For the six months ended January 31, 2001, interest income was $6,000,
compared with interest expense of $131,000 for the six months ended January 31,
2000. These changes in interest were attributable to interest income earned on
cash and cash equivalents during the three and six months ended January 31,
2001, compared with interest expense on outstanding borrowings under the
Company's revolving credit facilities during the three and six months ended
January 31, 2000.
Income from continuing operations before income taxes increased by
$1,129,000 to $2,913,000 for the six months ended January 31, 2001, from
$1,784,000 for the six months ended January 31, 2000.
Income taxes consist primarily of taxes imposed on the Company's Canadian
operations. The effective tax rate on Canadian operations was 42.5% and 44.2%
for the six months ended January 31, 2001 and 2000, respectively. For the six
months ended January 31, 2001, the consolidated effective tax rate was higher
than the Canadian effective tax rate due to state income tax expense incurred by
the United States operations, notwithstanding the fact that income generated by
the United States operations is substantially offset by Federal tax benefits
resulting from the utilization of net operating loss carryforwards. For the six
months ended January 31, 2000, the consolidated effective tax rate was lower
than the Canadian effective tax rate due to the fact that income generated by
the United States operations is substantially offset by tax benefits resulting
from the utilization of net operating loss carryforwards for both Federal and
state purposes.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2001, the Company's working capital was $15,453,000,
compared with $14,131,000 at July 31, 2000. This increase primarily reflects an
increase in inventories and a decrease in accounts payable, partially offset by
a decrease in net assets related to discontinued business.
Net cash used in operating activities was $1,354,000 for the six months
ended January 31, 2001 compared with net cash provided by operating activities
of $862,000 for the six months ended January 31, 2000. For the six months ended
January 31, 2001, the net cash used in operating activities was primarily due to
an increase in inventories and a decrease in accounts payable and accrued
expenses, partially offset by income from continuing operations, after adjusting
for depreciation and amortization. For the six months ended January 31,
11
2000, the net cash provided by operating activities was primarily due to income
from continuing operations, after adjusting for depreciation and amortization,
and a decrease in accounts receivable, partially offset by a decrease in
accounts payable and accrued expenses.
Net cash provided by investing activities was $1,180,000 for the six
months ended January 31, 2001 compared with net cash used in investing
activities of $1,759,000 for the six months ended January 31, 2000. For the six
months ended January 31, 2001, the net cash provided by investing activities was
primarily due to proceeds from the transfer of discontinued operations and a
decrease in net assets related to discontinued business, partially offset by
purchases of available-for-sale securities. For the six months ended January 31,
2000, net cash used in investing activities was primarily due to an increase in
net assets related to discontinued business.
Net cash used in financing activities was $39,000 for the six months ended
January 31, 2001 compared with net cash provided by financing activities of
$801,000 for the six months ended January 31, 2000. These changes were
principally due to the fluctuations in outstanding borrowings under the
Company's revolving credit facilities, partially offset for the six months ended
January 31, 2000 by purchases of Treasury Stock.
On February 23, 2001, the Company entered into a credit facility with a
United States bank and a Canadian bank which provides for i) a $2,500,000
revolving credit facility for Cantel and MediVators (the "U.S. Borrowers") (the
"U.S. Revolving Credit Facility") and ii) a $5,000,000 (United States dollars)
revolving credit facility for Carsen (the "Canadian Borrower") (the "Canadian
Revolving Credit Facility"), both of which revolving credit facilities expire on
February 22, 2004, and iii) a $12,500,000 acquisition facility available to the
U.S. Borrowers for permitted acquisitions in the United States through February
22, 2003 (the "Acquisition Facility"). Borrowings under the U.S. Revolving
Credit Facility and the Acquisition Facility will bear interest at rates ranging
from .25% to .75% above the United States lender's base rate, or at rates
ranging from 2% to 3% above the London Interbank Offered Rate ("LIBOR"),
depending upon the U.S. Borrowers' ratio of debt to earnings before interest,
taxes, depreciation and amortization ("EBITDA"). Borrowings under the Canadian
Revolving Credit Facility may be in either Canadian dollars or United States
dollars and will bear interest at rates ranging from .25% to .75% above the
Canadian lender's base rate, or at rates ranging from 2% to 3% above the LIBOR
rate, depending upon the Canadian Borrower's ratio of debt to EBITDA. The base
rates associated with the United States lender and the Canadian lender were
8.50% and 6.75%, respectively, at March 9, 2001. Each of the credit facilities
provides for available borrowings based upon percentages of eligible accounts
receivable and inventories; requires the respective borrower to meet certain
financial covenants; and is secured by substantially all assets of the
respective borrower. In addition, the
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U.S. Revolving Credit Facility is secured by the pledge of all of the
outstanding shares of MediVators stock owned by Cantel and the Canadian
Revolving Credit Facility is secured by substantially all assets (including the
pledge of 65% of the outstanding shares of Carsen stock owned by Cantel) of, and
is guaranteed by, the U.S. Borrowers.
For the six months ended January 31, 2001, compared with the six months
ended January 31, 2000, the average value of the Canadian dollar decreased by 2%
relative to the value of the United States dollar. Changes in the value of the
Canadian dollar against the United States dollar affects the Company's results
of operations because the Company's Canadian subsidiary purchases substantially
all of its products in United States dollars and sells its products in Canadian
dollars. Such currency fluctuations also result in a corresponding change in the
United States dollar value of the Company's assets that are denominated in
Canadian dollars.
Under the Carsen Revolving Credit Facility, the Company's Canadian
subsidiary has a $15,000,000 (United States dollars) foreign currency hedging
facility which is available to be used to hedge against the impact of such
currency fluctuations on the purchases of inventories. Total commitments for
foreign currency forward contracts (outstanding under a prior Carsen credit
facility) amounted to $1,262,000 (United States dollars) at March 9, 2001 and
cover a portion of Carsen's projected purchases of inventories through July
2001. The weighted average exchange rate of the forward contracts open at March
9, 2001 was $1.4586 Canadian dollar per United States dollar, or $.6856 United
States dollar per Canadian dollar. The exchange rate published by the Wall
Street Journal on March 9, 2001 was $1.5471 Canadian dollar per United States
dollar, or $.6464 United States dollar per Canadian dollar.
Effective August 1, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133, as amended, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES" ("SFAS No. 133"). In accordance with SFAS No. 133, these
foreign currency forward contracts are designated as hedges, and recognition of
gains and losses is deferred within other comprehensive income until settlement
of the underlying commitments. Realized gains and losses are recorded within
cost of sales upon settlement. The adoption of SFAS No. 133 did not have a
material impact on operations; however, it resulted in a $107,000 gain being
recorded in other comprehensive income. Additionally, the fair value of the
Company's derivatives was $33,000 at January 31, 2001, which resulted in the
recording of an unrealized loss of $74,000 during the six months ended January
31, 2001.
For purposes of translating the balance sheet, at January 31, 2001
compared with July 31, 2000, the value of the Canadian dollar decreased by 1%
relative to the value of the United States dollar. As a result, at January 31,
2001, the negative cumulative foreign currency translation adjustment was
increased by $97,000 compared to July 31,
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2000, thereby decreasing stockholders' equity.
The Company believes that its current cash position, anticipated cash flow
from operations, amounts to be received related to the discontinuance of the
Company's Consumer Products business and the funds available under the credit
facilities will be sufficient to satisfy the Company's cash operating
requirements for its existing operations for the foreseeable future. At March 9,
2001, $7,240,000 was available under the credit facilities.
Inflation has not significantly impacted the Company's operations.
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements. All forward-looking statements
involve risks and uncertainties, including, without limitation, acceptance and
demand of new products, the impact of competitive products and pricing, the
Company's ability to successfully integrate and operate acquired and merged
businesses and the risks associated with such businesses, and the risks detailed
in the Company's filings and reports with the Securities and Exchange
Commission. Such statements are only predictions, and actual events or results
may differ materially from those projected.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign currency market risk: Carsen purchases and pays for a substantial
portion of its products in United States dollars, and Carsen's business could be
materially and adversely affected by the imposition of trade barriers,
fluctuations in the rates of currency exchange, tariff increases and import and
export restrictions between the United States and Canada. Additionally, Carsen's
financial statements are translated using the accounting policies described in
Note 2 to the Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the fiscal year ended July 31, 2000. During the six
months ended January 31, 2001 compared with the six months ended January 31,
2000, fluctuations in the exchange rates between the United States dollar and
Canadian dollar had an insignificant impact upon the Company's results of
operations and an adverse impact upon stockholders' equity, as described in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Interest rate market risk: The Company has two credit facilities for which
the interest rate on outstanding borrowings, if any, is variable. Therefore,
interest expense is affected by the general level of interest rates in the
United States and Canada.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There was no submission of matters to a vote during the three months
ended January 31, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits-none.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months
ended January 31, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CANTEL MEDICAL CORP.
Date: March 9, 2001
By: /s/ JAMES P. REILLY
------------------------
James P. Reilly, President
and Chief Executive Officer
(Principal Executive Officer
and Principal Financial Officer)
By: /s/ CRAIG A. SHELDON
------------------------
Craig A. Sheldon, Vice
President and Controller
(Chief Accounting Officer)
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