<PAGE>
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, 1998.
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 07013-3346
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code
(973) 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 4, 1998: 4,376,200.
<PAGE>
PART I - FINANCIAL INFORMATION
CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
October 31, July 31,
1998 1998
-------- --------
ASSETS
Current assets:
Cash $ 549 $ 493
Accounts receivable 8,439 8,446
Inventories 9,174 9,207
Insurance claim receivable 392 563
Prepaid expenses and other current assets 609 465
-------- --------
Total current assets 19,163 19,174
Property and equipment, net 830 841
Intangible assets, net 1,784 1,823
Other assets 700 640
-------- --------
$ 22,477 $ 22,478
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,623 $ 4,148
Compensation payable 430 989
Other accrued expenses 800 893
Income taxes payable 62 164
-------- --------
Total current liabilities 4,915 6,194
Long-term debt 4,028 3,004
Deferred income taxes 60 54
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 -
4,373,629 shares; July 31 - 4,367,201 shares 437 437
Additional capital 19,062 19,019
Accumulated deficit (3,545) (3,957)
Accumulated other comprehensive income:
Cumulative foreign currency translation
adjustment (2,480) (2,273)
-------- --------
Total stockholders' equity 13,474 13,226
-------- --------
$ 22,477 $ 22,478
======== ========
See accompanying notes.
1
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CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
October 31,
1998 1997
-------- --------
Net sales:
Product sales $ 9,816 $ 7,230
Product service 1,050 962
-------- --------
Total net sales 10,866 8,192
-------- --------
Cost of sales:
Product sales 6,956 4,965
Product service 648 537
-------- --------
Total cost of sales 7,604 5,502
-------- --------
Gross profit 3,262 2,690
Expenses:
Shipping and warehouse 162 143
Selling 1,282 951
General and administrative 917 832
Research and development 187 190
-------- --------
Total operating expenses 2,548 2,116
-------- --------
Income from operations before
interest expense and income taxes 714 574
Interest expense 78 33
-------- --------
Income before income taxes 636 541
Income taxes 224 248
-------- --------
Net income $ 412 $ 293
======== ========
Earnings per common share:
Basic $ 0.09 $ 0.07
======== ========
Diluted $ 0.09 $ 0.07
======== ========
See accompanying notes.
2
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CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
(Unaudited)
Three Months Ended
October 31,
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 412 $ 293
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 111 64
Deferred income taxes 7 (8)
Changes in assets and liabilities:
Accounts receivable (133) 1,917
Inventories (117) 53
Prepaid expenses and other current assets 13 (164)
Accounts payable and accrued expenses (1,098) (1,944)
Income taxes payable (99) (556)
-------- --------
Net cash used in operating activities (904) (345)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (69) (121)
Other, net (45) (206)
-------- --------
Net cash used in investing activities (114) (327)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under credit facilities 1,031 613
Proceeds from exercise of stock options 43 -
-------- --------
Net cash provided by financing activities 1,074 613
-------- --------
Increase (decrease) in cash 56 (59)
Cash at beginning of period 493 656
-------- --------
Cash at end of period $ 549 $ 597
======== ========
See accompanying notes.
3
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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, 1998, 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, 1998 was derived from
the audited consolidated balance sheet of the Company at that date.
Note 2. NEW ACCOUNTING PRONOUNCEMENT
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 or stockholders' equity. The Company's comprehensive
income for the three months ended October 31, 1998 and 1997 are set forth in the
following table:
Three Months Ended
October 31,
-----------------------
1998 1997
-------- --------
Net income $412,000 $293,000
Other comprehensive income (loss):
Foreign currency translation adjustment (207,000) (215,000)
-------- --------
Comprehensive income $205,000 $ 78,000
======== ========
4
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Note 3. 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 options and warrants using the treasury stock method and the average
market price for the period.
The following weighted average shares were used for the computation of
basic and diluted earnings per common share:
Three Months Ended
October 31,
-------------------------
1998 1997
--------- ---------
Numerator for basic and diluted
earnings per share:
Net income $ 412,000 $ 293,000
========= =========
Denominator for basic and diluted
earnings per share:
Denominator for basic earnings
per share - weighted average
number of shares outstanding 4,371,952 4,166,322
Dilutive effect of options and
warrants using the treasury
stock method and the average
market price for the period 269,604 216,523
--------- ---------
Denominator for diluted earnings
per share - weighted average
number of shares and common
stock equivalents 4,641,556 4,382,845
========= =========
Basic earnings per share $ 0.09 $ 0.07
========= =========
Diluted earnings per share $ 0.09 $ 0.07
========= =========
Note 4. FINANCING ARRANGEMENTS
The Company has two credit facilities, a $5,000,000 revolving credit
facility for Carsen expiring on December 31, 1999 and a $1,500,000 revolving
credit facility for MediVators expiring on August 1, 2000. Borrowings under the
Carsen revolving credit facility are in Canadian dollars and bear interest at
rates ranging
5
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from lender's prime rate to .75% above the prime rate, depending upon Carsen's
debt to equity ratio. Borrowings under the MediVators revolving credit facility
bear interest at the lender's prime rate plus 1%. 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; is secured by substantially all
assets of the subsidiary; and is guaranteed by Cantel.
Note 5. INCOME TAXES
Income taxes consist primarily of taxes imposed on the Company's Canadian
operations. The effective tax rate on Canadian operations was 47.9% and 45.0%
for the three months ended October 31, 1998 and 1997, respectively. For the
three months ended October 31, 1998, the consolidated effective tax rate is
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.
6
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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 reflect the results of Carsen and MediVators.
Reference is made hereafter to the impact on the Company's results of operations
of a weaker Canadian dollar against the United States dollar during the three
months ended October 31, 1998 compared with the three months ended October 31,
1997 (decrease in value of approximately 10% based upon month-end exchange
rates). 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, 1998.
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 October 31,
-------------------------------------
1998 1997
----------------- -----------------
(Dollar amounts in thousands)
$ % $ %
------- ------- ------- -------
Medical Products $ 3,106 28.6 $ 2,365 28.9
Infection Control Products 2,600 23.9 1,531 18.6
Scientific Products 893 8.2 1,472 18.0
Product Service 1,050 9.7 962 11.7
Consumer Products 3,350 30.8 1,923 23.5
Elimination of intercompany
sales of Infection Control
Products (133) (1.2) (61) (.7)
------- ------- ------- -------
$10,866 100.0 $ 8,192 100.0
======= ======= ======= =======
Net sales increased by $2,674,000, or 32.6%, to $10,866,000 for the three
months ended October 31, 1998, from $8,192,000 for the three months ended
October 31, 1997. This increase was principally attributable to increased sales
of Medical Products, Infection Control Products and Consumer Products, partially
offset by decreased sales of Scientific Products. Net sales were adversely
impacted for the three months ended October 31, 1998 compared with the three
months ended October 31, 1997 by approximately $917,000 due to the translation
of Carsen's net sales using a weaker Canadian dollar against the United States
dollar.
The increased sales of Medical Products in Canada was principally due to an
increase in demand, as well as selling price increases. The increased sales of
Infection Control Products was attributable to an increase in demand for
infection control products in the United States; continued expansion and
improvement of the international distribution of MediVators' infection control
7
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products; and selling price increases. The increased sales of Consumer Products
was due to stronger demand for certain 35 mm. camera models, as well as the
strong demand for an expanded line of digital cameras. The decreased sales of
Scientific Products was primarily attributable to a decrease in demand for
microscopes.
Gross profit increased by $572,000, or 21.3%, to $3,262,000 for the three
months ended October 31, 1998, from $2,690,000 for the three months ended
October 31, 1997. Gross profit was adversely impacted for the three months
ended October 31, 1998 compared with the three months ended October 31, 1997 by
approximately $239,000 due to the translation of Carsen's gross profit using a
weaker Canadian dollar against the United States dollar. The gross profit
margin for the three months ended October 31, 1998 was 30.0%, compared with
32.8% for the three months ended October 31, 1997. The lower gross profit
margin for the three months ended October 31, 1998 was primarily attributable to
the adverse impact of a weaker Canadian dollar relative to the United States
dollar, since most of the Canadian subsidiary's purchases are denominated in
United States dollars; increased sales of consumer products, which generally
have lower profit margins; more competitive sales of medical products; and sales
mix associated with consumer products and endoscope repairs. These margin
decreases were partially offset by manufacturing efficiencies achieved through
increased sales and production volume of infection control products.
Shipping and warehouse expenses increased by $19,000 to $162,000 for the
three months ended October 31, 1998, from $143,000 for the three months ended
October 31, 1997. The increase was attributable to variable freight costs
associated with the increase in sales volume.
Selling expenses as a percentage of net sales increased to 11.8% for the
three months ended October 31, 1998, from 11.6% for the three months ended
October 31, 1997. This increase was principally attributable to an increase in
advertising and sales promotion costs, and personnel costs, partially offset by
the impact of the increased sales against the fixed portion of selling expenses.
General and administrative expenses increased by $85,000 to $917,000 for
the three months ended October 31, 1998, from $832,000 for the three months
ended October 31, 1997. The increase was primarily attributable to increased
personnel costs, including incentive compensation, amortization of intangible
assets, and regulatory costs, including ISO 9000 certification.
Research and development expenses decreased by $3,000 to $187,000 for the
three months ended October 31, 1998, from $190,000 for the three months ended
October 31, 1997.
8
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Interest expense increased to $78,000 for the three months ended October
31, 1998, from $33,000 for the three months ended October 31, 1997. This
increase was primarily attributable to an increase in average borrowings under
the Carsen revolving credit facility during the three months ended October 31,
1998.
Income before income taxes increased by $95,000 to $636,000 for the three
months ended October 31, 1998, from $541,000 for the three months ended October
31, 1997.
Income taxes consist primarily of taxes imposed on the Company's Canadian
operations. The effective tax rate on Canadian operations was 47.9% and 45.0%
for the three months ended October 31, 1998 and 1997, respectively. For the
three months ended October 31, 1998, the consolidated effective tax rate is
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.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1998, the Company's working capital was $14,248,000,
compared with $12,980,000 at July 31, 1998. This increase primarily reflects
decreases in accounts payable and compensation payable.
Net cash used in operating activities was $904,000 for the three months
ended October 31, 1998 and $345,000 for the three months ended October 31,
1997. The net cash used in operating activities for these periods was
primarily due to decreases in accounts payable and accrued expenses and
income taxes payable, partially offset by net income after adjusting for
depreciation and amortization and, for the three months ended October 31,
1997, a decrease in accounts receivable.
Net cash used in investing activities was $114,000 for the three months
ended October 31, 1998 and $327,000 for the three months ended October 31, 1997.
Net cash provided by financing activities was $1,074,000 for the three
months ended October 31, 1998 and $613,000 for the three months ended October
31, 1997. These changes were principally due to the fluctuations in outstanding
borrowings under the Company's revolving credit facilities.
The Company has two credit facilities, a $5,000,000 revolving credit
facility for Carsen expiring on December 31, 1999 and a $1,500,000 revolving
credit facility for MediVators expiring on August 1, 2000. Borrowings under the
Carsen revolving credit facility are in Canadian dollars and bear interest at
rates ranging from lender's prime rate to .75% above the prime rate, depending
9
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upon Carsen's debt to equity ratio. Borrowings under the MediVators revolving
credit facility bear interest at the lender's prime rate plus 1%. 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; is secured by
substantially all assets of the subsidiary; and is guaranteed by Cantel.
During the three months ended October 31, 1998, the value of the
Canadian dollar declined compared to the value of the United States dollar.
A further decrease in the value of the Canadian dollar against the United
States dollar would 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 would 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 months ended October 31, 1998, such
adverse currency fluctuations reduced stockholders' equity by $207,000.
Under the Carsen credit facility the Company's Canadian subsidiary has a
$15,000,000 (U.S. dollars) foreign exchange hedging facility which is available
to be used to minimize future adverse currency fluctuations as they relate to
purchases of inventories. Carsen had foreign exchange forward contracts at
December 4, 1998 aggregating $4,000,000 (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 December 1998. The
average exchange rate of the contracts open at December 4, 1998 was $1.5269
Canadian dollar per United States dollar, or $.6549 United States dollar per
Canadian dollar. The exchange rate published by the Wall Street Journal on
December 4, 1998 was $1.5345 Canadian dollar per United States dollar, or $.6517
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 December 4, 1998, $2,467,000
was available under the credit facilities.
The Company has assessed the ability of its computerized information
systems to process transactions relating to year 2000 and beyond. While certain
modifications are required, the Company expects to achieve necessary
modifications on a timely basis at a cost of approximately $50,000, the majority
of which will be capital expenditures. There can be no assurance, however, that
the systems of other companies on which the Company relies, including
10
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major suppliers and customers, will be timely converted, or that a failure to
successfully convert by another company, or a conversion that is incompatible
with the Company's systems, would not have an adverse impact on the Company's
operations. Management has requested a complete year 2000 assessment from all
of its major suppliers and customers, but has not yet received indications from
all of these parties as to whether or not they are year 2000 compliant.
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, the ability of the
Company's vendors and distributors to complete the necessary actions to achieve
a year 2000 conversion for its computer systems and applications, 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.
11
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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 October 31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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, 1998.
12
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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: December 11, 1998 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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT OCTOBER 31, 1998 AND THE CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED OCTOBER 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> OCT-31-1998
<CASH> 549,000
<SECURITIES> 0
<RECEIVABLES> 8,439,000
<ALLOWANCES> 0
<INVENTORY> 9,174,000
<CURRENT-ASSETS> 19,163,000
<PP&E> 2,611,000
<DEPRECIATION> 1,781,000
<TOTAL-ASSETS> 22,477,000
<CURRENT-LIABILITIES> 4,915,000
<BONDS> 4,028,000
437,000
0
<COMMON> 0
<OTHER-SE> 13,037,000
<TOTAL-LIABILITY-AND-EQUITY> 22,477,000
<SALES> 9,816,000
<TOTAL-REVENUES> 10,866,000
<CGS> 6,956,000
<TOTAL-COSTS> 7,604,000
<OTHER-EXPENSES> 2,548,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,000
<INCOME-PRETAX> 636,000
<INCOME-TAX> 224,000
<INCOME-CONTINUING> 412,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 412,000
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
