SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
/ X / Quarterly Report pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For the quarterly period ended October 31, 1995.
or
/ / Transition Report pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For the transition period from to .
----- -----
Commission file number: 0-6132
CANTEL INDUSTRIES, INC.
-----------------------
(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.)
1135 Broad Street, Clifton, New Jersey 07013
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code
(201) 470-8700
--------------
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes X No
----- -----
Number of shares of Common Stock outstanding as of December 12, 1995: 2,768,193
PART I - FINANCIAL INFORMATION
CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (NOTE 1)
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
October 31, July 31,
1995 1995
------------ ------------
ASSETS
Current assets:
Cash $ 376 $ 520
Accounts receivable, net 4,632 7,961
Inventories 7,952 7,232
Prepaid expenses and other current assets 1,024 303
------- -------
Total current assets 13,984 16,016
Property and equipment, at cost:
Furniture and equipment 841 1,135
Leasehold improvements 479 634
------- -------
1,320 1,769
Less accumulated depreciation and amortization 867 1,289
------- -------
453 480
Other assets 1,000 903
------- -------
$15,437 $17,399
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,330 $ 3,147
Compensation payable 688 849
Other accrued expenses 490 493
Income taxes payable - 364
------- -------
Total current liabilities 3,508 4,853
Long-term debt 5,279 6,087
Deferred income taxes 96 91
Stockholders' equity:
Preferred Stock, par value $1.00 per share;
authorized 1,000,000 shares; none issued - -
Common Stock, $.10 par value; authorized 7,500,000
shares; issued and outstanding October 31 -
2,768,193 shares; July 31 - 2,768,193 shares 277 277
Additional capital 8,539 8,539
Accumulated deficit (1,100) (1,187)
Cumulative foreign currency translation adjustment (1,162) (1,261)
------- -------
Total stockholders' equity 6,554 6,368
------- -------
$15,437 $17,399
------- -------
------- -------
See accompanying notes.
1
CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
October 31,
1995 1994
------- -------
Net sales $ 5,429 $ 6,313
Cost of sales 3,755 4,361
------- -------
Gross profit 1,674 1,952
Expenses:
Shipping and warehouse 193 190
Selling 933 915
General and administrative 648 587
------- -------
Total operating expenses 1,774 1,692
------- -------
Income (loss) from continuing operations
before interest expense and income
taxes (100) 260
Interest expense 13 95
------- -------
Income (loss) from continuing operations
before income taxes (113) 165
Income taxes (200) 104
------- -------
Net income $ 87 $ 61
------- -------
------- -------
Earnings per common share:
Primary $ 0.03 $ 0.02
------- -------
------- -------
Fully diluted $ 0.03 $ 0.02
------- -------
------- -------
See accompanying notes.
2
CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1)
(Dollar Amounts in Thousands)
(Unaudited)
Three Months Ended
October 31,
1995 1994
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations $ 87 $ 61
Adjustments to reconcile income from continuing
operations to net cash provided by (used in)
operating activities:
Depreciation and amortization 38 30
Imputed interest 3 7
Deferred income taxes 5 -
Changes in assets and liabilities:
Accounts receivable 3,329 586
Inventories (720) 9
Prepaid expenses and other current assets (721) (96)
Accounts payable and accrued expenses (951) (1,003)
Income taxes payable (364) (824)
------ ------
Net cash provided by (used in) operating activities 706 (1,230)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Net disposals (additions) to property and equipment 7 (40)
Other, net (16) 46
------ ------
Net cash (used in) provided by investing activities (9) 6
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 4,244 4,049
Repayment of long-term debt (5,052) (3,204)
Deferred compensation payments (33) (32)
------ ------
Net cash (used in) provided by financing activities (841) 813
------ ------
Decrease in cash (144) (411)
Cash at beginning of period 520 521
------ ------
Cash at end of period $ 376 $ 110
------ ------
------ ------
See accompanying notes.
3
CANTEL INDUSTRIES, INC.
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 Cantel Industries, Inc.'s
("Company") Annual Report on Form 10-K for the fiscal year ended July 31, 1995,
and Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein.
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, 1995 was derived from
the audited consolidated balance sheet at that date.
Note 2. INCOME TAXES
Income taxes primarily consist of foreign income taxes provided on the
Company's Canadian operations. For the three months ended October 31, 1995,
income taxes include a benefit resulting from the loss from continuing
operations before income taxes at an effective rate of 43.9%, as well as a
recovery of prior years' federal and provincial income taxes and withholding
taxes. The effective tax rate on Canadian operations was 44.4% for the three
months ended October 31, 1994.
The recovery of prior years' federal and provincial income taxes and
withholding taxes related to a notice of reassessment received by the Company's
Canadian subsidiary during fiscal 1994, which notice was based upon the
disallowance as a deduction for income tax purposes and treatment as a taxable
dividend, of all of the payments made to Cantel by the Canadian subsidiary
during the taxable years 1990 to 1992 with respect to a purchasing fee charged
by Cantel for negotiating certain distribution agreements on behalf of the
Canadian subsidiary. In prior years, the Company recorded the full amount of
the reassessment, which aggregated approximately $413,000, in its provision for
income taxes, and the related
4
interest, of approximately $154,000, as interest expense. During the three
months ended October 31, 1994, the full amount of the reassessment, including
interest, was paid under protest. During the three months ended October 31,
1995, the Company negotiated a settlement with Revenue Canada which resulted in
the recovery of federal and provincial income taxes and withholding taxes of
approximately $175,000 and interest of approximately $98,000. This tax refund
has not yet been received by the Company.
Note 3. EARNINGS PER COMMON SHARE
Primary earnings per common share are computed based upon the weighted
average number of common shares outstanding during the period plus common stock
equivalents where dilutive.
Fully diluted earnings per common share are computed on the assumption that
the weighted average number of common shares outstanding during the period was
further increased by the exercise of those stock options and warrants for which
the period-end market price of the Common Stock exceeded the average market
price.
The following average shares were used for the computation of primary and
fully diluted earnings per share (see Exhibit 11 for computation of Earnings per
Share):
Three months ended
October 31,
1995 1994
--------- ---------
Primary 3,264,307 3,146,534
--------- ---------
--------- ---------
Fully diluted 3,290,399 3,146,534
--------- ---------
--------- ---------
Note 4. FINANCING ARRANGEMENTS
The revolving credit facility entered into during fiscal 1994, as amended,
is comprised of a $7,500,000 revolving credit facility to the Company's Canadian
subsidiary. The maximum borrowing availability under this facility decreases
annually over a three year period commencing January 1, 1996 and must be paid in
full no later than December 31, 1998. The Company is permitted to borrow an
amount up to (i) 75%-85% of certain eligible accounts receivable, depending on
the customer, and (ii) 50% of qualifying inventory, depending on the type of
goods in inventory; however, any trade letters of credit issued under this
facility will reduce the maximum available borrowings by 50% of the amount of
such trade letters of credit, while any standby letters of credit, including the
$500,000 letter of credit issued to Olympus America Inc. during November 1993,
reduces the maximum available borrowings by the full
5
amount of such standby letters of credit. The Company has the right to borrow
funds under this facility in either United States dollars or Canadian dollars, a
portion of which may be in the form of bankers acceptances. The borrowings
outstanding at October 31, 1995 and July 31, 1995 are in Canadian dollars.
United States dollar borrowings bear interest at .5% above the lender's United
States base rate, and Canadian dollar borrowings bear interest at .75% above the
lender's Canadian prime rate. A commitment fee on the unused portion of this
facility is payable in arrears at a rate of .25% per annum, with interest on
borrowings payable monthly. Borrowings under this facility are guaranteed by
Cantel and secured by substantially all assets of the Company's Canadian
subsidiary and require the subsidiary to meet certain financial covenants,
including a minimum working capital ratio, a minimum interest coverage ratio, a
maximum debt to tangible net worth ratio, and an annual limitation on capital
expenditures.
Note 5. PROPOSED ACQUISITION OF MEDIVATORS, INC.
On November 14, 1995, the Company entered into an Agreement and Plan of
Merger which provides for the Company's acquisition of MediVators, Inc.
("MediVators") through a merger transaction. Upon consummation of the proposed
merger, MediVators will be a wholly-owned subsidiary of the Company and the
stockholders of MediVators will own approximately a 26.5% equity interest in
Cantel (without giving effect to outstanding options and warrants to acquire
stock of Cantel or MediVators). The transaction will be treated as a pooling of
interests for accounting purposes.
MediVators is a public company which designs, manufactures and markets
infection control equipment and supplies used for disinfecting flexible
endoscopes and medical waste disposal equipment. MediVators is currently a
supplier of endoscope washers/disinfectors to the Company.
The merger is subject to, among other things, the approval of the Company's
stockholders and MediVators' stockholders. No assurance can be given that such
conditions will be satisfied or that the merger will be consummated.
In connection with the proposed merger, the Company has filed a
Registration Statement on Form S-4 with the Securities and Exchange Commission,
which has not yet been declared effective, which will cover the issuance of the
Company's Common shares to the stockholders of MediVators in exchange for shares
of MediVators common stock. The issuance of shares of the Company's stock in
the merger will be made only by means of the prospectus included in the
Registration Statement.
6
Historical financial information for MediVators' fiscal years ended
December 31, 1994, 1993 and 1992 is as follows:
1994 1993 1992
---- ---- ----
Total assets $4,313,000 $3,430,000 $4,393,000
Total stockholders'
equity $3,558,000 $2,936,000 $3,976,000
Net sales $3,310,000 $2,888,000 $2,014,000
Net loss from
continuing
operations $ (736,000) $(1,570,000) $(1,059,000)
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF CONTINUING OPERATIONS
The results of continuing operations described hereafter reflect, for the
most part, those results of the Company's wholly-owned Canadian subsidiary,
Carsen Group Inc. There was no significant impact upon the Company's results of
operations for the three months ended October 31, 1995, as compared to the three
months ended October 31, 1994, as a result of translating Canadian dollars into
United States dollars. In order to further analyze the results of operations,
certain comparisons will be presented in Canadian dollars as well as United
States dollars. 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,
1995.
Net sales in Canadian dollars decreased by $1,268,000, or 14.8%, to
$7,304,000 for the three months ended October 31, 1995, from $8,572,000 for the
three months ended October 31, 1994; when translated into United States dollars,
the net sales decreased by $884,000, or 14.0%, to $5,429,000 for the three
months ended October 31, 1995, from $6,313,000 for the three months ended
October 31, 1994. This decrease was principally attributable to the decreased
sales of the Consumer Products Division resulting from lower demand for product,
primarily attributable to the loss of national account business. The Company is
in the process of addressing current market conditions by restructuring this
division's sales functions and marketing strategies. Partially offsetting the
decreased sales of the Consumer Products Division were increased sales in the
Scientific Products segment, principally within the Precision Instruments and
Industrial Technology Divisions. These sales increases resulted from increased
demand for new products such as the Olympus B-Max microscope, the restructuring
of the sales functions and the implementation of new marketing strategies in
these divisions, and increases in selling prices for certain products.
Gross profit in Canadian dollars decreased by $406,000, or 15.3%, to
$2,250,000 for the three months ended October 31, 1995, from $2,656,000 for the
three months ended October 31, 1994; when translated into United States dollars,
the gross profit decreased by $278,000, or 14.2%, to $1,674,000 for the three
months ended October 31, 1995, from $1,952,000 for the three months ended
October 31, 1994. The gross profit decreased as a percentage of net sales to
30.8% for the three months ended October 31, 1995, from 30.9% for the three
months ended October 31, 1994. The lower gross profit margin for the first
quarter of fiscal 1996 is principally attributable to price increases from a
major supplier, of which only a portion was passed along to customers; this
decrease was partially offset by an increase in gross margin
8
attributable to the decreased sales of the Consumer Products Division which
generally have lower profit margins.
Shipping and warehouse expenses as a percentage of net sales increased to
3.6% for the three months ended October 31, 1995, from 3.0% for the three months
ended October 31, 1994. This percentage increase was principally attributable
to the decrease in sales, since most of the expenses in this category are of a
fixed nature.
Selling expenses as a percentage of net sales were 17.2% for the three
months ended October 31, 1995, as compared with 14.5% for the three months ended
October 31, 1994. This percentage increase was principally attributable to the
decrease in sales and an increase in the number of sales personnel.
General and administrative expenses increased by $61,000 to $648,000 for
the three months ended October 31, 1995 from $587,000 for the three months ended
October 31, 1994. This increase primarily reflects professional fees related to
the proposed acquisition of MediVators, Inc.
Interest expense decreased to $13,000 for the three months ended October
31, 1995, as compared with $95,000 for the three months ended October 31, 1994.
This decrease is due to a recovery of interest of approximately $98,000 related
to the tax reassessments described in Note 2 to the Condensed Consolidated
Financial Statements, partially offset by an increase in interest expense
attributable to an increase in interest rates and an increase in average
borrowings under the Canadian revolver.
Income (loss) from continuing operations before income taxes decreased by
$278,000 to a loss of $113,000 for the three months ended October 31, 1995 from
income of $165,000 for the three months ended October 31, 1994.
Income taxes represent taxes recoverable on the Company's Canadian
operations for the three months ended October 31, 1995, as well as a recovery of
taxes related to the tax reassessment described in Note 2 to the Condensed
Consolidated Financial Statements, and taxes imposed on the Canadian operations
for the three months ended October 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1995, the Company's working capital was $10,476,000, as
compared with $11,163,000 at July 31, 1995. This decrease primarily reflects
a reduction in accounts receivable, partially offset by increases in
inventories and other current assets, including income tax receivables and
prepaid income taxes of approximately $685,000, and a decrease in current
liabilities. Long-term debt decreased from $6,087,000 at July 31, 1995 to
$5,279,000 at October 31, 1995.
9
Net cash provided by operating activities was $706,000 for the three
months ended October 31, 1995, as compared with net cash used in operating
activities of $1,230,000 for the three months ended October 31, 1994. This
change was primarily due to a decrease in accounts receivable, partially
offset by increases in inventories and other current assets, including income
tax receivables and prepaid income taxes, and decreases in current
liabilities. Net cash used in investing activities was $9,000 for the three
months ended October 31, 1995, as compared with net cash provided by
investing activities of $6,000 for the three months ended October 31, 1994.
Net cash used in financing activities was $841,000 for the three months ended
October 31, 1995, as compared with net cash provided by financing activities
of $813,000 for the three months ended October 31, 1994. This change
principally reflects borrowings and repayments under the revolving credit
facility.
The revolving credit facility entered into during fiscal 1994, as amended,
is comprised of a $7,500,000 revolving credit facility to the Company's Canadian
subsidiary. The maximum borrowing availability under this facility decreases
annually over a three year period commencing January 1, 1996 and must be paid in
full no later than December 31, 1998. The Company is permitted to borrow an
amount up to (i) 75%-85% of certain eligible accounts receivable, depending on
the customer, and (ii) 50% of qualifying inventory, depending on the type of
goods in inventory; however, any trade letters of credit issued under this
facility will reduce the maximum available borrowings by 50% of the amount of
such trade letters of credit, while any standby letters of credit, including the
$500,000 letter of credit issued to Olympus America Inc. during November 1993,
reduces the maximum available borrowings by the full amount of such standby
letters of credit. The Company has the right to borrow funds under this
facility in either United States dollars or Canadian dollars, a portion of which
may be in the form of bankers acceptances. The borrowings outstanding at
October 31, 1995 and July 31, 1995 are in Canadian dollars. United States
dollar borrowings bear interest at .5% above the lender's United States base
rate, and Canadian dollar borrowings bear interest at .75% above the lender's
Canadian prime rate. A commitment fee on the unused portion of this facility is
payable in arrears at a rate of .25% per annum, with interest on borrowings
payable monthly. Borrowings under this facility are guaranteed by Cantel and
secured by substantially all assets of the Company's Canadian subsidiary and
require the subsidiary to meet certain financial covenants, including a minimum
working capital ratio, a minimum interest coverage ratio, a maximum debt to
tangible net worth ratio, and an annual limitation on capital expenditures.
A decrease in the value of the Canadian dollar against the United States
dollar could adversely affect the Company because the Company's Canadian
subsidiary purchases substantially all of its products in United States dollars
and sells its products in Canadian dollars. Such adverse currency fluctuations
could also
10
result in a corresponding adverse change in the United States dollar value of
the Company's assets that are denominated in Canadian dollars. Under the credit
facility, as amended, the Company's Canadian subsidiary has a foreign exchange
hedging arrangement of up to $15,000,000 (U.S. dollars) which could be used to
minimize future adverse currency fluctuations as they relate to purchases of
inventories.
The Company's Canadian subsidiary has forward exchange contracts at October
31, 1995 aggregating $7,500,000 (United States dollars) to hedge against
possible declines in the value of the Canadian dollar which would otherwise
result in higher inventory costs. Such contracts represent the Canadian
subsidiary's projected purchases of inventories through February 29, 1996.
The average exchange rate of the contracts open at October 31, 1995 was
$1.3648 Canadian dollar per United States dollar, or $.7327 United States dollar
per Canadian dollar. The exchange rate published by the Wall Street Journal on
December 12, 1995, was $1.3774 Canadian dollar per United States dollar, or
$.7260 United States dollar per Canadian dollar.
The Company believes that its anticipated cash flow from operations and the
funds available under the credit facility will be sufficient to satisfy the
Company's cash operating requirements for the foreseeable future. At December
12, 1995, $1,673,000 was available under the credit facility.
Inflation has not significantly impacted the Company's operations.
11
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 quarter ended
October 31, 1995.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11, Computation of Earnings Per Share
Exhibit 27, Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months
ended October 31, 1995.
12
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 INDUSTRIES, INC.
Date: December 14, 1995 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)
13
EXHIBIT 11
CANTEL INDUSTRIES, INC.
COMPUTATION OF EARNINGS PER SHARE
Three Months Ended
October 31,
1995 1994
--------- ---------
PRIMARY
Weighted average number of shares outstanding 2,768,193 2,735,128
Dilutive effect of options and warrants
using the treasury stock method and
average market price for the period 496,114 411,406
--------- ---------
Weighted average number of shares and
common stock equivalents 3,264,307 3,146,534
--------- ---------
--------- ---------
Net income $ 87,000 $ 61,000
--------- ---------
--------- ---------
Net income per common share $0.03 $0.02
--------- ---------
--------- ---------
14
EXHIBIT 11
CANTEL INDUSTRIES, INC.
COMPUTATION OF EARNINGS PER SHARE
Three Months Ended
October 31,
1995 1994
--------- ---------
FULLY DILUTED
Weighted average number of shares outstanding 2,768,193 2,735,128
Dilutive effect of options and warrants
using the treasury stock method and the
higher of the period end or average market
price for the period 522,206 411,406
--------- ---------
Weighted average number of shares and
common stock equivalents 3,290,399 3,146,534
--------- ---------
--------- ---------
Net income $ 87,000 $ 61,000
--------- ---------
--------- ---------
Net income per common share $0.03 $0.02
--------- ---------
--------- ---------
15