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 January 31, 1997.
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.
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(Exact name of registrant as specified in its charter)
DELAWARE 22-1760285
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1135 BROAD STREET, CLIFTON, NEW JERSEY 07013
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code
(201) 470-8700
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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
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Number of shares of Common Stock outstanding as of March 5, 1997: 4,166,322.
PART I - FINANCIAL INFORMATION
CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands, Except Share Data)
(Unaudited)
January 31, July 31,
1997 1996
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ASSETS
Current assets:
Cash $ 842 $ 682
Accounts receivable, net 6,254 5,268
Inventories 8,857 8,196
Prepaid expenses and other current assets 486 308
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Total current assets 16,439 14,454
Property and equipment, at cost:
Furniture and equipment 1,918 1,796
Leasehold improvements 527 697
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2,445 2,493
Less accumulated depreciation and amortization 1,794 1,884
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651 609
Other assets 1,005 935
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$18,095 $15,998
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,093 $ 1,486
Compensation payable 773 722
Other accrued expenses 646 792
Income taxes payable 373 81
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Total current liabilities 4,885 3,081
Long-term debt 2,317 3,419
Deferred income taxes 104 97
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 January 31 -
4,166,322 shares; July 31 - 3,888,695 shares 417 389
Additional capital 17,609 17,088
Accumulated deficit (6,084) (6,748)
Cumulative foreign currency translation adjustment (1,153) (1,328)
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Total stockholders' equity 10,789 9,401
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$18,095 $15,998
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See accompanying notes.
1
CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
January 31, January 31,
1997 1996 1997 1996
------- ------- ------- -------
Net sales:
Product sales $ 8,618 $ 6,692 $ 15,051 $ 12,065
Product service 993 1,009 1,975 1,888
------- ------- ------- -------
Total net sales 9,611 7,701 17,026 13,953
------- ------- ------- -------
Cost of sales:
Product sales 5,702 4,398 9,952 8,089
Product service 600 661 1,229 1,237
------- ------- ------- -------
Total cost of sales 6,302 5,059 11,181 9,326
------- ------- ------- -------
Gross profit 3,309 2,642 5,845 4,627
Expenses:
Shipping and warehouse 162 186 303 379
Selling 1,136 1,158 2,030 2,231
General and administrative 927 757 1,758 1,547
Research and development 171 114 282 201
Costs associated with the Merger - - - 68
------- ------- ------- -------
Total operating expenses 2,396 2,215 4,373 4,426
------- ------- ------- -------
Income from operations before
interest expense and income
taxes 913 427 1,472 201
Interest expense 45 107 92 119
------- ------- ------- -------
Income before income taxes 868 320 1,380 82
Income taxes 426 201 716 1
------- ------- ------- -------
Net income $ 442 $ 119 $ 664 $ 81
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------- ------- ------- -------
Earnings per common share:
Primary $ .10 $ .03 $ .15 $ .02
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------- ------- ------- -------
Fully diluted $ .10 $ .03 $ .15 $ .02
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------- ------- ------- -------
See accompanying notes.
2
CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
(Unaudited)
Six Months Ended
January 31,
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 664 $ 81
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 161 195
Imputed interest - 4
Deferred income taxes 7 7
Changes in assets and liabilities:
Accounts receivable (986) 3,298
Inventories (661) (271)
Prepaid expenses and other current assets (178) (408)
Accounts payable and accrued expenses 1,558 (1,037)
Income taxes payable 292 (364)
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Net cash provided by operating activities 857 1,505
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CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property and equipment (172) (9)
Other, net 74 (113)
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Net cash used in investing activities (98) (122)
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CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under credit facilities 8,491 8,539
Repayments under credit facilities (9,639) (10,185)
Proceeds from exercise of stock options and warrants 549 7
Deferred compensation payments - (63)
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Net cash used in financing activities (599) (1,702)
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Increase (decrease) in cash 160 (319)
Cash at beginning of period 682 799
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Cash at end of period $ 842 $ 480
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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 the Annual Report of Cantel
Industries, Inc. (the "Company" or "Cantel") on Form 10-K for the fiscal year
ended July 31, 1996, and Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere herein.
The acquisition of MediVators, Inc., the Company's United States subsidiary
("MediVators"), which occurred on March 15, 1996 (the "Merger") has been
accounted for as a pooling of interests in accordance with generally accepted
accounting principles. Under this accounting treatment, the assets, liabilities
and stockholders' equity of MediVators were consolidated at their historical
amounts. Operating results of MediVators were consolidated for all periods
presented, and previously issued financial statements for the Company are
restated as though MediVators had always been consolidated as a wholly-owned
subsidiary of the Company.
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, 1996 was derived from
the audited consolidated balance sheet of the Company at that date.
Note 2. 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 the dilutive
effect of options and warrants using the treasury stock method and the average
market price for the period.
4
Fully 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 options and warrants using the treasury stock method and the
higher of the period-end or average market price for the period.
The following weighted average shares were used for the computation of
primary and fully diluted earnings per common share:
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
--------------------- ---------------------
1997 1996 1997 1996
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Primary 4,358,846 4,335,829 4,339,811 4,307,108
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully diluted 4,378,121 4,344,003 4,356,391 4,340,211
--------- --------- --------- ---------
--------- --------- --------- ---------
Note 3. FINANCING ARRANGEMENTS
The Company has two credit facilities, a $5,000,000 revolving credit
facility for Carsen Group Inc., its Canadian subsidiary ("Carsen" or "Canadian
subsidiary") and a $2,000,000 revolving credit facility for MediVators.
Carsen's revolving credit facility was reduced from $7,500,000 effective January
10, 1997 at Carsen's request.
Pursuant to the terms of the Carsen revolving credit facility, borrowing
availability is subject to a potential further reduction on January 1, 1998 to
an amount which will be agreed to by both Carsen and the lender, and borrowings
under such facility must be paid in full no later than December 31, 1999.
Borrowings outstanding at January 31, 1997 and July 31, 1996 are in Canadian
dollars and bear interest at .75% above the lender's Canadian prime rate. The
lender's Canadian prime rate was 4.75% at January 31, 1997. 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. There were $2,155,000 (U.S.
dollars) of borrowings outstanding under this facility at January 31, 1997.
Pursuant to the terms of the MediVators revolving credit facility,
borrowings must be paid in full no later than December 3, 1998. Borrowings bear
interest at 1.5% above the lender's United States prime rate. The lender's
prime rate was 8.25% at January 31, 1997. A commitment fee on the unused
portion of this facility is payable in arrears at a rate of .5% per annum, with
interest on
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borrowings payable monthly. There were $116,000 of borrowings outstanding under
this facility at January 31, 1997.
Each of the credit facilities provides for restrictions on available
borrowings based primarily upon percentages of eligible accounts receivable and
inventories; requires the subsidiary to meet certain financial covenants; are
secured by substantially all assets of the subsidiary; and are guaranteed by
Cantel.
Note 4. INCOME TAXES
Income taxes primarily consist of foreign income taxes provided on the
Company's Canadian operations. The effective tax rate on Canadian operations
was 44.6% and 43.9% for the six months ended January 31, 1997 and 1996,
respectively. Income taxes for the six months ended January 31, 1996 was offset
by a recovery of prior years' federal and provincial income taxes and
withholding taxes.
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 interest, of approximately $154,000, as interest
expense. During fiscal 1995, the full amount of the reassessment, including
interest, was paid under protest. During the six months ended January 31, 1996,
the Company negotiated a settlement with Revenue Canada which resulted in the
recovery of federal and provincial income taxes and withholding taxes of
approximately $182,000 and interest of approximately $103,000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The results of operations described hereafter reflect the results of the
Company's wholly-owned Canadian subsidiary, Carsen Group Inc. ("Carsen" or
"Canadian subsidiary") and its wholly-owned U.S. subsidiary, MediVators, Inc.
("MediVators" or "United States subsidiary"). There was no significant impact
upon the Company's results of operations for the six months ended January 31,
1997, compared with the six months ended January 31, 1996, as a result of
translating Canadian dollars into United States dollars. The ensuing discussion
should also be read in conjunction with the Company's Annual Report on Form 10-K
for the fiscal year ended July 31, 1996.
The following table gives information as to the net sales from operations
and the percentage to the total net sales accounted for by each operating
segment of the Company.
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
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1997 1996 1997 1996
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$ % $ % $ % $ %
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Medical, Infection
Control and Scientific
Products:
Medical and
Infection Control
Products $5,665 58.9 $4,156 54.0 $ 9,284 54.5 $ 6,953 49.9
Scientific
Products 1,583 16.5 1,455 18.9 3,029 17.8 2,918 20.9
Product Service 993 10.3 1,009 13.1 1,975 11.6 1,888 13.5
Consumer Products 1,370 14.3 1,081 14.0 2,738 16.1 2,194 15.7
------ ----- ------ ----- ------- ----- ------- ----
$9,611 100.0 $7,701 100.0 $17,026 100.0 $13,953 100.0
------ ----- ------ ----- ------- ----- ------- -----
------ ----- ------ ----- ------- ----- ------- -----
Net sales increased by $1,910,000, or 24.8%, to $9,611,000 for the three
months ended January 31, 1997, from $7,701,000 for the three months ended
January 31, 1996. Net sales increased by $3,073,000, or 22.0%, to $17,026,000
for the six months ended January 31, 1997, from $13,953,000 for the six months
ended January 31, 1996. These increases were principally attributable to
increased sales of Medical and Infection Control Products and Consumer Products.
The increased sales of Medical and Infection Control Products for the three
and six months ended January 31, 1997 were primarily attributable to an increase
in demand for both medical and infection control products. These increases
include the initial
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positive impact of the strategic alliance with Olympus America Inc. ("Olympus")
for the sale of MediVators' endoscope disinfection equipment; expansion and
improvement of the international distribution of MediVators' infection control
products; and the improvement in economic conditions in Canada, where sales of
medical products during the three and six months ended January 31, 1996 were
adversely impacted by certain cost control measures implemented by various
provincial governments which decreased or delayed funding to hospitals, thereby
reducing hospital spending for capital equipment. The increased sales of
Consumer Products for the three and six months ended January 31, 1997 were due
to stronger demand for certain camera models with reduced selling prices as well
as the demand for digital cameras, which were introduced during the three months
ended January 31, 1997.
Gross profit increased by $667,000, or 25.2%, to $3,309,000 for the three
months ended January 31, 1997, from $2,642,000 for the three months ended
January 31, 1996. Gross profit increased by $1,218,000, or 26.3%, to $5,845,000
for the six months ended January 31, 1997, from $4,627,000 for the six months
ended January 31, 1996. The gross profit margins for the three and six months
ended January 31, 1997 were 34.4% and 34.3%, respectively, compared with 34.3%
and 33.2% for the three and six month periods ended January 31, 1996. The
higher gross profit margins were primarily attributable to increased sales of
medical and infection control products which generally carry higher margins and
a more efficient method of repairing endoscopes, partially offset by increased
sales of consumer products which generally have lower profit margins.
Shipping and warehouse expenses decreased by $24,000 to $162,000 for the
three months ended January 31, 1997, from $186,000 for the three months ended
January 31, 1996. For the six months ended January 31, 1997, shipping and
warehouse expenses decreased by $76,000 to $303,000, from $379,000 for the six
months ended January 31, 1996. These decreases were primarily attributable to
reductions in rent and freight costs.
Selling expenses as a percentage of net sales decreased to 11.8% and 11.9%
for the three and six months ended January 31, 1997, from 15.0% and 16.0% for
the three and six months ended January 31, 1996. These decreases were
principally attributable to the impact of the increased sales for such periods
compared to the fixed portion of selling expenses; a reduction in personnel
costs and advertising costs at Carsen; and the elimination of certain variable
selling expenses previously associated with the domestic distribution of
MediVators' endoscope disinfection equipment, which distribution is now being
performed by Olympus.
General and administrative expenses increased by $170,000 to $927,000 for
the three months ended January 31, 1997, from $757,000 for the three months
ended January 31, 1996. For the six months ended January 31, 1997, general and
administrative expenses
8
increased by $211,000 to $1,758,000, from $1,547,000 for the six months ended
January 31, 1996. These increases were primarily attributable to increased
personnel costs, the majority of which represents incentive compensation, and
professional fees and MediVators' relocation expenses.
Costs associated with the Merger of $68,000 for the six months ended
January 31, 1996 represented expenses incurred in connection with the MediVators
acquisition, which was accounted for as a pooling of interests.
Interest expense decreased to $45,000 for the three months ended January
31, 1997, from $107,000 for the three months ended January 31, 1996. For the
six months ended January 31, 1997, interest expense decreased to $92,000, from
$119,000 for the six months ended January 31, 1996. These decreases were
attributable to a decrease in average borrowings and lower average interest
rates under the Carsen revolving credit facility during the three and six months
ended January 31, 1997. Additionally, during the six months ended January 31,
1996, there was a recovery of interest at Carsen of approximately $103,000
related to the tax reassessments described in Note 4 to the Condensed
Consolidated Financial Statements.
Income before income taxes increased by $1,298,000 to $1,380,000 for the
six months ended January 31, 1997 from $82,000 for the six months ended January
31, 1996.
Income taxes consist primarily of foreign income taxes provided on the
Company's Canadian operations. The effective tax rate on Canadian operations
was 44.6% and 43.9% for the six months ended January 31, 1997 and 1996,
respectively. Income taxes for the six months ended January 31, 1996 was offset
by a recovery of prior years' federal and provincial income taxes and
withholding taxes related to the tax reassessments described in Note 4 to the
Condensed Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1997, the Company's working capital was $11,554,000,
compared with $11,373,000 at July 31, 1996. This increase primarily reflects
increases in accounts receivable and inventories partially offset by increases
in accounts payable and income taxes payable. Long-term debt decreased to
$2,317,000 at January 31, 1997 from $3,419,000 at July 31, 1996.
Net cash provided by operating activities was $857,000 for the six months
ended January 31, 1997, compared with $1,505,000 for the six months ended
January 31, 1996. For the six months ended January 31, 1997, the net cash
provided by operating activities was primarily due to income from operations
after adjusting for depreciation and amortization and an increase in accounts
payable
9
and accrued expenses, partially offset by increases in accounts receivable and
inventories. For the six months ended January 31, 1996, the net cash provided
by operating activities was primarily due to a decrease in accounts receivable,
partially offset by an increase in prepaid expenses and other current assets and
decreases in accounts payable and accrued expenses and income taxes payable.
Net cash used in investing activities was $98,000 for the six months ended
January 31, 1997 and $122,000 for the six months ended January 31, 1996.
Net cash used in financing activities was $599,000 for the six months ended
January 31, 1997 and $1,702,000 for the six months ended January 31, 1996.
These changes were principally due to the reduction in outstanding borrowings
under the Carsen revolving credit facility, partially offset during the six
months ended January 31, 1997 by proceeds from the exercise of stock options and
warrants.
The Company has two credit facilities, a $5,000,000 revolving credit
facility for Carsen and a $2,000,000 revolving credit facility for MediVators.
Carsen's revolving credit facility was reduced from $7,500,000 effective January
10, 1997 at Carsen's request.
Pursuant to the terms of the Carsen revolving credit facility, borrowing
availability is subject to a potential further reduction on January 1, 1998 to
an amount which will be agreed to by both Carsen and the lender, and borrowings
under such facility must be paid in full no later than December 31, 1999.
Borrowings outstanding at January 31, 1997 and July 31, 1996 are in Canadian
dollars and bear interest at .75% above the lender's Canadian prime rate. The
lender's Canadian prime rate was 4.75% at January 31, 1997. 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. There were $2,155,000 (U.S.
dollars) of borrowings outstanding under this facility at January 31, 1997.
Pursuant to the terms of the MediVators revolving credit facility,
borrowings must be paid in full no later than December 3, 1998. Borrowings bear
interest at 1.5% above the lender's United States prime rate. The lender's
prime rate was 8.25% at January 31, 1997. A commitment fee on the unused
portion of this facility is payable in arrears at a rate of .5% per annum, with
interest on borrowings payable monthly. There were $116,000 of borrowings
outstanding under this facility at January 31, 1997.
Each of the credit facilities provides for restrictions on available
borrowings based primarily upon percentages of eligible accounts receivable and
inventories; requires the subsidiary to meet certain financial covenants; are
secured by substantially all assets of the subsidiary; and are guaranteed by
Cantel.
10
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 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 Canadian credit facility, the Company's Canadian subsidiary has a foreign
exchange hedging facility 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 foreign exchange forward contracts
at March 5, 1997 aggregating approximately $9,000,000 (U.S. dollars) to hedge
against possible declines in the value of
the Canadian dollar which would otherwise result in higher inventory costs.
Such contracts represented the Canadian subsidiary's projected purchases of
inventories through July 31, 1997.
The average exchange rate of the contracts open at March 5, 1997 was
$1.3412 Canadian dollar per United States dollar, or $.7456 United States dollar
per Canadian dollar. The exchange rate published by the Wall Street Journal on
March 5, 1997, was $1.3689 Canadian dollar per United States dollar, or $.7305
United States dollar per Canadian dollar.
The Company believes that its anticipated cash flow from operations 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 5, 1997, $4,839,000
was available under the credit facilities.
Inflation has not significantly impacted the Company's operations.
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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, 1997.
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 January 31, 1997.
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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 INDUSTRIES, INC.
Date: March 12, 1997 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
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Craig A. Sheldon, Vice
President and Controller
(Chief Accounting Officer)
13