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 April 30, 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.
(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 June 2, 1997:
4,166,322.
PART I - FINANCIAL INFORMATION
CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands, Except Share Data)
(Unaudited)
April 30, July 31,
1997 1996
--------- --------
Assets
Current assets:
Cash $ 767 $ 682
Accounts receivable 4,246 5,268
Inventories 8,818 8,196
Prepaid expenses and other current assets 490 308
------- -------
Total current assets 14,321 14,454
Property and equipment, at cost:
Furniture and equipment 1,914 1,796
Leasehold improvements 550 697
------- -------
2,464 2,493
Less accumulated depreciation and amortization 1,807 1,884
------- -------
657 609
Other assets 895 935
------- -------
$15,873 $15,998
======= =======
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,462 $ 1,486
Compensation payable 640 722
Other accrued expenses 626 792
Income taxes payable 523 81
------- -------
Total current liabilities 4,251 3,081
Long-term debt 898 3,419
Deferred income taxes 102 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 April 30 -
4,166,322 shares; July 31 - 3,888,695 shares 417 389
Additional capital 17,609 17,088
Accumulated deficit (5,920) (6,748)
Cumulative foreign currency translation adjustment (1,484) (1,328)
------- -------
Total stockholders' equity 10,622 9,401
------- -------
$15,873 $15,998
======= =======
See accompanying notes.
1
CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
April 30, April 30,
1997 1996 1997 1996
-------- -------- -------- -------
Net sales:
Product sales $ 6,833 $ 6,569 $ 21,884 $ 18,632
Product service 1,088 917 3,063 2,807
------- ------- -------- --------
Total net sales 7,921 7,486 24,947 21,439
------- ------- -------- --------
Cost of sales:
Product sales 4,580 4,218 14,533 12,306
Product service 676 567 1,904 1,805
------- ------- -------- --------
Total cost of sales 5,256 4,785 16,437 14,111
------- ------- -------- --------
Gross profit 2,665 2,701 8,510 7,328
Expenses:
Shipping and warehouse 139 153 442 532
Selling 1,048 1,054 3,078 3,285
General and administrative 818 810 2,576 2,357
Research and development 178 89 460 290
Costs associated with the Merger -- 382 -- 450
------- ------- -------- --------
Total operating expenses 2,183 2,488 6,556 6,914
------- ------- -------- --------
Income from operations before
interest expense and income
taxes 482 213 1,954 414
Interest expense 33 84 125 203
------- ------- -------- --------
Income before income taxes 449 129 1,829 211
Income taxes 285 200 1,001 201
------- ------- -------- --------
Net income (loss) $ 164 $ (71) $ 828 $ 10
======= ======= ======= =======
Earnings (loss) per common share:
Primary $ 0.04 $ (0.02) $ 0.19 $ --
======= ======= ======= =======
Fully diluted $ 0.04 $ (0.02) $ 0.19 $ --
======= ======= ======= =======
See accompanying notes.
2
CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
(Unaudited)
Nine Months Ended
April 30,
1997 1996
-------- --------
Cash flows from operating activities
Net income $ 828 $ 10
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 231 275
Imputed interest -- 5
Deferred income taxes 5 13
Changes in assets and liabilities:
Accounts receivable 1,022 3,485
Inventories (622) 571
Prepaid expenses and other current assets (182) 22
Accounts payable and accrued expenses 773 (2,052)
Income taxes payable 442 (364)
------- ------
Net cash provided by operating activities 2,497 1,965
------- ------
Cash flows from investing activities
Net additions to property and equipment (249) (48)
Other, net (146) (78)
------- ------
Net cash used in investing activities (395) (126)
------- ------
Cash flows from financing activities
Borrowings under credit facilities 12,060 13,030
Repayments under credit facilities (14,626) (15,152)
Proceeds from exercise of stock options and warrants 549 158
Deferred compensation payments -- (101)
------- ------
Net cash used in financing activities (2,017) (2,065)
------- ------
Increase (decrease) in cash 85 (226)
Cash at beginning of period 682 799
------- ------
Cash at end of period $ 767 $ 573
======= ======
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 nine months ended
April 30, April 30,
------------------ -----------------
1997 1996 1997 1996
-------- -------- ------- --------
Primary 4,401,291 3,770,541 4,359,601 4,271,030
========= ========= ========= =========
Fully diluted 4,401,291 3,770,541 4,359,601 4,278,376
========= ========= ========= =========
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.
Pursuant to the terms of the Carsen revolving credit facility, borrowings
under such facility must be paid in full no later than December 31, 1999.
Borrowings outstanding at April 30, 1997 and July 31, 1996 are in Canadian
dollars. Borrowings bear interest at rates ranging from lender's Canadian prime
rate to .75% above the prime rate, depending upon Carsen's debt to equity ratio.
At April 30, 1997, the lender's Canadian prime rate was 4.75% and Carsen's
outstanding borrowings bear interest at a rate of .25% above the 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. There were
$501,000 (U.S. dollars) of borrowings outstanding under this facility at April
30, 1997.
Pursuant to the terms of the MediVators revolving credit facility,
borrowings under such facility 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 8.50% at April 30, 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 $352,000 of
borrowings outstanding under this facility at April 30, 1997.
5
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 nine months ended April 30, 1997 and 1996, respectively.
However, the consolidated effective tax rate is higher due to the fact that
losses generated by the Company's combined U.S. operations cannot be used to
offset income generated by the Canadian operation. Income taxes for the nine
months ended April 30, 1996 were 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 nine months ended April 30, 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.
6
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 nine months ended April 30,
1997, compared with the nine months ended April 30, 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 and the
percentage to the total net sales accounted for by each operating segment of the
Company.
Three Months Ended Nine Months Ended
April 30, April 30,
----------------------------- -----------------------------
1997 1996 1997 1996
----------------------------- -----------------------------
$ % $ % $ % $ %
------ ------ ----- ----- ------ ------- ----- ----
Medical, Infection
Control and Scientific
Products:
Medical and
Infection Control
Products $4,321 54.5 $4,097 54.7 $13,605 54.5 $11,050 51.5
Scientific
Products 1,288 16.3 1,746 23.3 4,317 17.3 4,663 21.8
Product Service 1,088 13.7 917 12.3 3,063 12.3 2,807 13.1
Consumer Products 1,224 15.5 726 9.7 3,962 15.9 2,919 13.6
------ ----- ------ ----- ------- ----- ------- -----
$7,921 100.0 $7,486 100.0 $24,947 100.0 $21,439 100.0
====== ===== ====== ===== ======= ===== ======= =====
Net sales increased by $435,000, or 5.8%, to $7,921,000 for the three
months ended April 30, 1997, from $7,486,000 for the three months ended April
30, 1996. Net sales increased by $3,508,000, or 16.4%, to $24,947,000 for the
nine months ended April 30, 1997, from $21,439,000 for the nine months ended
April 30, 1996. These increases were principally attributable to increased sales
of Medical and Infection Control Products and Consumer Products, partially
offset by decreased sales of Scientific Products.
The increased sales of Medical and Infection Control Products for both the
three and nine months ended April 30, 1997 were primarily attributable to an
increase in demand for medical products. For the nine months ended April 30,
1997, the increased
7
sales of Medical and Infection Control Products were also attributable to an
increase in demand for infection control products. These increases include the
initial 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 nine months ended
April 30, 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 nine months ended April
30, 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 fiscal 1997. The decreased sales of Scientific Products was due primarily
to lower demand for microscopes in the clinical market.
Gross profit decreased by $36,000, or 1.3%, to $2,665,000 for the three
months ended April 30, 1997, from $2,701,000 for the three months ended April
30, 1996. Gross profit increased by $1,182,000, or 16.1%, to $8,510,000 for the
nine months ended April 30, 1997, from $7,328,000 for the nine months ended
April 30, 1996. The gross profit margins for the three and nine months ended
April 30, 1997 were 33.6% and 34.1%, respectively, compared with 36.1% and 34.2%
for the three and nine month periods ended April 30, 1996. The lower gross
profit margin for the three months ended April 30, 1997 was primarily
attributable to more competitive sales as well as a change in the sales mix of
medical and infection control products and increased sales of consumer products,
which generally have lower profit margins. For the nine months ended April 30,
1997, higher gross margins attributable to increased sales of medical and
infection control products, which generally have higher profit margins, and a
more efficient method of repairing endoscopes were offset by increased sales of
consumer products, which generally have lower profit margins.
Shipping and warehouse expenses decreased by $14,000 to $139,000 for the
three months ended April 30, 1997, from $153,000 for the three months ended
April 30, 1996. For the nine months ended April 30, 1997, shipping and warehouse
expenses decreased by $90,000 to $442,000, from $532,000 for the nine months
ended April 30, 1996. These decreases were primarily attributable to reductions
in freight costs, rent and personnel costs.
Selling expenses as a percentage of net sales decreased to 13.2% and 12.3%
for the three and nine months ended April 30, 1997, from 14.1% and 15.3% for the
three and nine months ended April 30, 1996. These decreases were principally
attributable to the impact of the increased sales for the fiscal 1997 periods
compared to the
8
fixed portion of selling expenses, 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. For the nine months ended April 30, 1997, the decrease was
also attributable to a reduction in personnel costs and advertising costs at
Carsen.
General and administrative expenses increased by $8,000 to $818,000 for
the three months ended April 30, 1997, from $810,000 for the three months ended
April 30, 1996. For the nine months ended April 30, 1997, general and
administrative expenses increased by $219,000 to $2,576,000, from $2,357,000 for
the nine months ended April 30, 1996. These increases were primarily
attributable to increased personnel costs, some of which represent incentive
compensation, professional fees and MediVators' relocation expenses.
Research and development expenses increased by $89,000 to $178,000 for the
three months ended April 30, 1997, from $89,000 for the three months ended April
30, 1996. For the nine months ended April 30, 1997, research and development
expenses increased by $170,000 to $460,000, from $290,000 for the nine months
ended April 30, 1996. These increases were substantially due to planned
activities at MediVators.
Costs associated with the Merger of $450,000 for the nine months ended
April 30, 1996 represented expenses incurred in connection with the MediVators
acquisition, which was accounted for as a pooling of interests.
Interest expense decreased to $33,000 for the three months ended April 30,
1997, from $84,000 for the three months ended April 30, 1996. For the nine
months ended April 30, 1997, interest expense decreased to $125,000, from
$203,000 for the nine months ended April 30, 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 nine
months ended April 30, 1997. Additionally, during the nine months ended April
30, 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 $1,618,000 to $1,829,000 for the
nine months ended April 30, 1997, from $211,000 for the nine months ended April
30, 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 nine months ended April 30, 1997 and 1996, respectively.
However, the consolidated effective tax rate is higher due to the fact that
losses generated by the Company's combined U.S. operations cannot be used to
offset income generated by the Canadian operation. Income taxes for the nine
months ended April 30, 1996 were offset by a recovery of prior
9
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 April 30, 1997, the Company's working capital was $10,070,000, compared
with $11,373,000 at July 31, 1996. This decrease primarily reflects increases in
accounts payable and income taxes payable and a decrease in accounts receivable,
partially offset by an increase in inventories. Long-term debt decreased to
$898,000 at April 30, 1997 from $3,419,000 at July 31, 1996.
Net cash provided by operating activities was $2,497,000 for the nine
months ended April 30, 1997, compared with $1,965,000 for the nine months ended
April 30, 1996. For the nine months ended April 30, 1997, the net cash provided
by operating activities was primarily due to income from operations after
adjusting for depreciation and amortization, a decrease in accounts receivable
and increases in accounts payable and accrued expenses and income taxes payable,
partially offset by an increase in inventories. For the nine months ended April
30, 1996, the net cash provided by operating activities was primarily due to
income from operations after adjusting for depreciation and amortization and
decreases in accounts receivable and inventories, partially offset by decreases
in accounts payable and accrued expenses and income taxes payable.
Net cash used in investing activities was $395,000 for the nine months
ended April 30, 1997 and $126,000 for the nine months ended April 30, 1996. This
increase was primarily due to an increase in net additions to property and
equipment associated with MediVators' manufacturing facilities.
Net cash used in financing activities was $2,017,000 for the nine months
ended April 30, 1997 and $2,065,000 for the nine months ended April 30, 1996.
These changes were principally due to the reduction in outstanding borrowings
under the Carsen revolving credit facility, partially offset 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.
Pursuant to the terms of the Carsen revolving credit facility, borrowings
under such facility must be paid in full no later than December 31, 1999.
Borrowings outstanding at April 30, 1997 and July 31, 1996 are in Canadian
dollars. Borrowings bear interest at rates ranging from lender's Canadian prime
rate to .75% above the prime rate, depending upon Carsen's debt to equity ratio.
At April
10
30, 1997, the lender's Canadian prime rate was 4.75% and Carsen's outstanding
borrowings bear interest at a rate of .25% above the 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. There were $501,000
(U.S. dollars) of borrowings outstanding under this facility at April 30, 1997.
Pursuant to the terms of the MediVators revolving credit facility,
borrowings under such facility 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 8.50% at April 30, 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 $352,000 of
borrowings outstanding under this facility at April 30, 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.
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. 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. 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. During the three and nine months ended April 30, 1997, such
adverse currency fluctuations reduced stockholders' equity by $331,000 and
$156,000, respectively.
The Company's Canadian subsidiary has foreign exchange forward contracts
at June 2, 1997 aggregating approximately $4,500,000 (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.
11
The average exchange rate of the contracts open at June 2, 1997 was
$1.3315 Canadian dollar per United States dollar, or $.7510 United States dollar
per Canadian dollar. The exchange rate published by the Wall Street Journal on
June 2, 1997, was $1.3752 Canadian dollar per United States dollar, or $.7272
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 June 2, 1997, $5,173,000 was available under the credit
facilities.
Inflation has not significantly impacted the Company's operations.
12
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There was no submission of matters to a vote during the three months
ended April 30, 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 April 30, 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: June 10, 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
--------------------------------------
Craig A. Sheldon, Vice
President and Controller
(Chief Accounting Officer)
14