-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mi/ExQBRgdjHa4nqCAdp9rG8mSE6U6pr8PfMyslFVOMBn29krXHN2G1Dq+cyHdfc XJ3oVV8rJgvndM5gbnlXKA== 0000912057-02-024103.txt : 20020613 0000912057-02-024103.hdr.sgml : 20020613 20020613155537 ACCESSION NUMBER: 0000912057-02-024103 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020430 FILED AS OF DATE: 20020613 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CANTEL MEDICAL CORP CENTRAL INDEX KEY: 0000019446 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 221760285 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-31337 FILM NUMBER: 02678328 BUSINESS ADDRESS: STREET 1: OVERLOOK AT GREAT NOTCH STREET 2: 150 CLOVE ROAD CITY: LITTLE FALLS STATE: NJ ZIP: 07424 BUSINESS PHONE: 9734708700 MAIL ADDRESS: STREET 1: OVERLOOK AT GREAT NOTCH STREET 2: 150 CLOVE ROAD CITY: LITTLE FALLS STATE: NJ ZIP: 07424 FORMER COMPANY: FORMER CONFORMED NAME: CHARVOZ CARSEN CORP DATE OF NAME CHANGE: 19861215 FORMER COMPANY: FORMER CONFORMED NAME: CANTEL INDUSTRIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: STENDIG INDUSTRIES INC DATE OF NAME CHANGE: 19890425 10-Q 1 a2082314z10-q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q / X / Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended April 30, 2002. or / / Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____ to _____. Commission file number: 0-6132 CANTEL MEDICAL CORP. -------------------- (Exact name of registrant as specified in its charter) Delaware 22-1760285 - ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 150 Clove Road, Little Falls, New Jersey 07424 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (973) 890-7220 -------------- 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 7, 2002: 9,165,702. PART I - FINANCIAL INFORMATION CANTEL MEDICAL CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollar Amounts in Thousands, Except Share Data) (Unaudited)
April 30, July 31, 2002 2001 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 8,909 $ 5,050 Available-for-sale securities -- 1,057 Accounts receivable, net 23,908 11,768 Inventories: Raw materials 6,545 2,294 Work-in-process 1,780 -- Finished goods 9,315 5,872 --------- --------- Total inventories 17,640 8,166 --------- --------- Deferred income taxes 3,936 49 Prepaid expenses and other current assets 1,425 404 --------- --------- Total current assets 55,818 26,494 Property and equipment, net 22,987 844 Intangible assets, net 7,994 622 Goodwill 15,357 585 Deferred income taxes 4,474 -- Other assets 3,062 3,384 --------- --------- $ 109,692 $ 31,929 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 2,500 $ -- Accounts payable 5,401 4,115 Compensation payable 2,471 1,337 Other accrued expenses 5,532 2,562 Income taxes payable 1,860 1,811 --------- --------- Total current liabilities 17,764 9,825 Long-term debt 28,500 -- Deferred income taxes 6,866 77 Other long-term liabilities 1,791 -- Stockholders' equity: Preferred Stock, par value $1.00 per share; authorized 1,000,000 shares; none issued -- -- Common Stock, $.10 par value; authorized 20,000,000 shares; April 30 - 9,427,192 shares issued and 9,157,077 shares outstanding; July 31 - 7,099,738 shares issued and 6,838,914 shares outstanding 943 710 Additional capital 48,397 20,003 Retained earnings 9,654 4,477 Accumulated other comprehensive loss (3,031) (2,143) Treasury Stock, at cost; April 30 - 270,115 shares; July 31 - 260,824 shares (1,192) (1,020) --------- --------- Total stockholders' equity 54,771 22,027 --------- --------- $ 109,692 $ 31,929 ========= =========
See accompanying notes. CANTEL MEDICAL CORP. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollar Amounts in Thousands, Except Per Share Data) (Unaudited)
Three Months Ended Nine Months Ended April 30, April 30, 2002 2001 2002 2001 -------- -------- -------- -------- Net sales: Product sales $ 30,964 $ 11,417 $ 81,055 $ 29,628 Product service 2,232 1,559 6,206 4,718 -------- -------- -------- -------- Total net sales 33,196 12,976 87,261 34,346 -------- -------- -------- -------- Cost of sales: Product sales 18,650 7,281 49,698 18,343 Product service 1,396 863 3,773 2,490 -------- -------- -------- -------- Total cost of sales 20,046 8,144 53,471 20,833 -------- -------- -------- -------- Gross profit 13,150 4,832 33,790 13,513 Operating expenses: Selling 3,991 1,410 10,395 4,128 General and administrative 3,856 1,340 10,709 3,948 Research and development 1,073 248 2,739 703 -------- -------- -------- -------- Total operating expenses 8,920 2,998 23,843 8,779 -------- -------- -------- -------- Income from continuing operations before interest expense (income), other income and income taxes 4,230 1,834 9,947 4,734 Interest expense (income) 586 (1) 1,717 (7) Other income (26) -- (69) (7) -------- -------- -------- -------- Income from continuing operations before income taxes 3,670 1,835 8,299 4,748 Income taxes 1,356 694 3,122 1,970 -------- -------- -------- -------- Income from continuing operations 2,314 1,141 5,177 2,778 Gain on disposal of discontinued operations -- 225 -- 225 -------- -------- -------- -------- Net income $ 2,314 $ 1,366 $ 5,177 $ 3,003 ======== ======== ======== ======== Earnings per common share: Basic: Continuing operations $ 0.25 $ 0.17 $ 0.59 $ 0.42 Discontinued operations -- 0.03 -- 0.03 -------- -------- -------- -------- Net income $ 0.25 $ 0.20 $ 0.59 $ 0.45 ======== ======== ======== ======== Diluted: Continuing operations $ 0.23 $ 0.15 $ 0.54 $ 0.39 Discontinued operations -- 0.03 -- 0.03 -------- -------- -------- -------- Net income $ 0.23 $ 0.18 $ 0.54 $ 0.42 ======== ======== ======== ========
See accompanying notes. 2 CANTEL MEDICAL CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar Amounts in Thousands) (Unaudited)
Nine Months Ended April 30, 2002 2001 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Income from continuing operations $ 5,177 $ 2,778 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Income from discontinued operations -- 225 Depreciation and amortization 2,563 416 Amortization of debt issuance costs 376 -- Changes in assets and liabilities: Accounts receivable 29 (189) Inventories 977 (1,993) Prepaid expenses and other current assets 19 11 Accounts payable and accrued expenses (3,805) (1,941) Income taxes (1,236) 700 -------- -------- Net cash provided by operating activities 4,100 7 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (1,077) (335) Purchases of available-for-sale securities -- (725) Acquisition of Minntech, net of cash acquired (28,846) -- Acquisition of Technimed (279) -- Cash (used in) provided by discontinued operations (39) 814 Proceeds from transfer of discontinued operations -- 2,350 Other, net 99 (507) -------- -------- Net cash (used in) provided by investing activities (30,142) 1,597 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under credit facilities, net of debt issuance costs 34,070 -- Repayments under credit facilities (4,475) (125) Proceeds from exercise of stock options 306 169 -------- -------- Net cash provided by financing activities 29,901 44 -------- -------- Increase in cash and cash equivalents 3,859 1,648 Cash and cash equivalents at beginning of period 5,050 2,169 -------- -------- Cash and cash equivalents at end of period $ 8,909 $ 3,817 ======== ========
See accompanying notes. 3 CANTEL MEDICAL CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. BASIS OF PRESENTATION The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and the requirements of Form 10-Q and Rule 10.01 of Regulation S-X. Accordingly, they do not include certain information and note disclosures required by generally accepted accounting principles for annual financial reporting and should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report of Cantel Medical Corp. (the "Company" or "Cantel") on Form 10-K for the fiscal year ended July 31, 2001, and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. Cantel had two wholly-owned operating subsidiaries at July 31, 2001. Its United States subsidiary, MediVators, Inc. ("MediVators") is engaged in the manufacturing, marketing, distribution and service of infection control products. Its Canadian subsidiary, Carsen Group Inc. ("Carsen" or "Canadian subsidiary") is engaged in the marketing, distribution and service of medical and infection control and scientific products in Canada. On September 7, 2001, the Company completed its acquisition of Minntech Corporation ("Minntech") which became a wholly-owned subsidiary of Cantel. Minntech, which is based in the United States and has operations in the Netherlands, is engaged in the development, manufacturing and marketing of disinfection/reprocessing systems and other products for renal dialysis as well as filtration and separation products for medical and non-medical applications. The unaudited interim financial statements reflect all adjustments (consisting only of those of a normal and recurring nature) 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, 2001 was derived from the audited consolidated balance sheet of the Company at that date. The Company issued 3,143,000 additional shares in connection with a three-for-two stock split effected in the form of a 50% stock dividend paid on May 14, 2002 to stockholders of record on May 7, 2002. The effect of the stock split has been recognized retroactively in the stockholders' equity accounts in the Condensed Consolidated Balance Sheets, and all share data in the Condensed Consolidated Statements of Income, Notes to Condensed Consolidated Financial Statements, and 4 Management's Discussion and Analysis of Financial Condition and Results of Operations. Certain items in the April 30, 2001 financial statements have been reclassified from statements previously presented to conform to the presentation of the April 30, 2002 financial statements. Note 2. ACQUISITIONS On September 7, 2001, the Company completed its acquisition of Minntech, a public company based in Plymouth, Minnesota, in a merger transaction. Under the terms of the Agreement and Plan of Merger, each share of Minntech was converted into the right to receive $10.50, consisting of $6.25 in cash, and a fraction of a share of Cantel common stock having a value of $4.25. With respect to the stock portion of the consideration, Cantel issued approximately 2,201,000 shares of common stock in the merger. The total consideration for the transaction, including transaction costs, was approximately $77.9 million (including cash of $41,392,000, shares of Cantel common stock with a fair market value of $28,148,000, Cantel's existing investment in Minntech of $725,000 and transaction costs, including severence obligations, of approximately $7,600,000). The transaction was accounted for as a purchase and in accordance with the provisions of Statement of Financial Accounting Standards No. 141, "BUSINESS COMBINATIONS" ("SFAS 141"). Minntech is reflected in the Company's results of operations for the three months ended April 30, 2002, for the portion of the nine months ended April 30, 2002 subsequent to its acquisition on September 7, 2001, and is not reflected in the results of operations for the three and nine months ended April 30, 2001. In conjunction with the acquisition, on September 7, 2001 Cantel entered into new credit facilities to fund the financed portion of the cash consideration paid in the merger and costs associated with the merger, as well as to replace the Company's existing working capital credit facilities, as discussed in note 8 to the Condensed Consolidated Financial Statements. The purchase price was preliminarily allocated to the assets acquired and assumed liabilities as follows: cash $17,395,000; accounts receivable $12,353,000; inventories $10,539,000; other current assets $4,809,000; fixed assets $23,230,000; intangible assets $7,705,000 (with estimated useful lives ranging from 2-14 years); other noncurrent assets $594,000; current liabilities $9,750,000; noncurrent deferred compensation $1,767,000; and long-term deferred income tax liabilities $5,922,000. Current liabilities include an estimated liability recorded by Minntech of approximately $1,900,000 related to certain state sales and use tax exposures. Cantel will evaluate this contingency and reflect any change to the liability balance as an adjustment of the preliminary purchase price allocation. Additionally, in conjunction with the purchase price accounting, 5 Cantel reversed the valuation allowance associated with its deferred tax assets originating from net operating loss carryforwards ("NOLs"), resulting in $4,083,000 of net deferred tax assets. The excess purchase price of $14,609,000 was assigned to goodwill. Selected unaudited pro forma consolidated statement of income data assuming that Minntech was included in the Company's results of operations as of the beginning of the periods ended April 30, 2002 and 2001 is as follows:
Three Months Ended Nine Months Ended April 30, April 30, --------------------------- --------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Net sales $33,196,000 $32,574,000 $95,086,000 $92,346,000 Income from contin- uing operations 2,314,000 378,000 4,746,000 4,214,000 Earnings per share: Basic $ 0.25 $ 0.04 $ 0.52 $ 0.47 Diluted $ 0.23 $ 0.04 $ 0.48 $ 0.45 Weighted average common shares: Basic 9,108,000 8,907,000 9,080,000 8,879,000 Diluted 9,963,000 9,617,000 9,884,000 9,405,000
This pro forma information is provided for illustrative purposes only, and does not necessarily indicate what the operating results of the combined company might have been had the merger actually occurred at the beginning of each of these periods, nor does it necessarily indicate what the combined company's future operating results will be. This information also does not reflect any cost savings from operating efficiencies or other improvements which may be achieved by combining the companies. On November 1, 2001, the Company's Canadian subsidiary acquired substantially all of the assets, business and properties of Technimed Instruments Inc. and Technimed International Inc. (collectively "Technimed") for approximately $405,000, which included cash of approximately $241,000 and a note payable in three equal annual installments with a present value of approximately $164,000. This transaction was accounted for as a purchase and in accordance with the provisions of SFAS 141. The purchase price was preliminarily allocated to the assets acquired and assumed liabilities as follows: current assets $148,000; fixed assets $30,000; intangible assets $172,000; and current liabilities $105,000. The excess purchase price of $160,000 was assigned to goodwill. The acquisition of Technimed had an insignificant impact upon operations for the three and nine months ended April 30, 2002. 6 Technimed was a private company based in Montreal, Canada which services medical equipment, including rigid endoscopes and hand-held surgical instrumentation. Note 3. RECENT ACCOUNTING PRONOUNCEMENT In June 2001, the Financial Accounting Standards Board issued SFAS 141, and SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS" ("SFAS 142"). SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). Upon adoption of SFAS 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under SFAS 141 will be reclassified to goodwill. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. Companies are required to adopt SFAS 142 for fiscal years beginning after December 15, 2001, but early adoption is permitted. The Company adopted SFAS 142 on August 1, 2001, which is the beginning of fiscal 2002. At April 30, 2002, substantially all of the Company's goodwill relates to the acquisition of Minntech in September 2001. Note 4. COMPREHENSIVE INCOME The Company's comprehensive income for the three and nine months ended April 30, 2002 and 2001 is set forth in the following table:
Three Months Ended Nine Months Ended April 30, April 30, 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Net income $ 2,314,000 $ 1,366,000 $ 5,177,000 $ 3,003,000 Other comprehensive income (loss): Unrealized gain on securities -- 101,000 -- 172,000 Unrealized (loss) gain on currency hedging (138,000) 18,000 (245,000) (56,000) Unrealized loss on interest rate cap (26,000) -- (70,000) -- Foreign currency translation 591,000 (381,000) (241,000) (478,000) ----------- ----------- ----------- ----------- Comprehensive income $ 2,741,000 $ 1,104,000 $ 4,621,000 $ 2,641,000 =========== =========== =========== ===========
At July 31, 2001, the Company had an unrealized gain on securities of $332,000 which was eliminated during the nine months ended April 30, 2002 in connection with the Minntech acquisition purchase accounting. The elimination of this unrealized gain had no impact upon the Company's results of operations. 7 Note 5. HEDGING ACTIVITIES Effective August 1, 2000, the Company adopted SFAS No. 133, as amended, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS No. 133"). SFAS No. 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives will either be offset against the change in the fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the change in fair value of a derivative that is designated as a hedge will be immediately recognized in earnings. The Company's Canadian subsidiary purchases and pays for a substantial portion of its products in United States dollars and is therefore exposed to fluctuations in the rates of exchange between the United States dollar and Canadian dollar. In order to hedge against the impact of such currency fluctuations on the purchases of inventories, Carsen enters into foreign currency forward contracts on firm purchases of such inventories in United States dollars. Total commitments for such foreign currency forward contracts amounted to $14,750,000 (United States dollars) at April 30, 2002 and cover a portion of Carsen's projected purchases of inventories through January 2003. The Company also has new credit facilities for which the interest rate on outstanding borrowings is variable, as discussed in note 8 to the Condensed Consolidated Financial Statements. Therefore, interest expense is principally affected by the general level of interest rates in the United States and Canada. In order to protect its interest rate exposure, the Company has entered into a three-year interest rate cap covering $12,500,000 of borrowings under its credit facilities. The foreign currency forward contracts and the interest rate cap are designated as hedges, and therefore recognition of gains and losses is deferred within other comprehensive income until settlement of the underlying commitments. Realized gains and losses related to the foreign currency forward contracts are recorded within cost of sales upon settlement. Realized gains and losses related to the interest rate cap are recorded within interest expense. The Company does not hold any derivative financial instruments for speculative or trading purposes. The adoption of SFAS No. 133 on August 1, 2000 did not have a material impact on operations; however, it resulted in a $107,000 gain being recorded in other comprehensive income. 8 Note 6. DISCONTINUED OPERATIONS On October 6, 2000, Carsen consummated a transaction under an Asset Purchase Agreement with Olympus America Inc. ("Olympus") pursuant to which Carsen terminated its consumer products business and sold its inventories of Olympus consumer products to Olympus. The transaction had an effective date of July 31, 2000 and was treated as a discontinued operation. The purchase price for the inventory was $1,026,000, net of adjustments related to estimated warranty claims and promotional program expenses payable to Carsen's former customers. During fiscal 2001, Carsen also received additional consideration from Olympus under the Purchase Agreement, including amounts related to transition services provided by Carsen subsequent to July 31, 2000. Such consideration included (i) fixed cash amounts aggregating approximately $615,000 and (ii) $619,000 representing twelve and one-half percent (12 1/2%) of Olympus' net sales of consumer products in Canada in excess of $8,000,000 during the period from August 1, 2000 through March 31, 2001. No additional amounts are due from Olympus. At April 30, 2002 and July 31, 2001, remaining liabilities of the discontinued business were $54,000 and $96,000, respectively, and are included within other accrued expenses. Note 7. EARNINGS PER COMMON SHARE Basic earnings per common share are computed based upon the weighted average number of common shares outstanding during the period. Diluted earnings per common share are computed based upon the weighted average number of common shares outstanding during the period plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price for the period. As described in note 1 to the Condensed Consolidated Financial Statements, the calculations of weighted average common shares and earnings per share for all periods presented reflect the May 2002 stock split. 9 The following table sets forth the computation of basic and diluted earnings per common share:
Three Months Ended Nine Months Ended April 30, April 30, 2002 2001 2002 2001 ---------- ------------- ---------- ------------- Numerator for basic and diluted earnings per common share: Income from continuing operations $2,314,000 $ 1,141,000 $5,177,000 $ 2,778,000 Income from discontinued operations -- 225,000 -- 225,000 ---------- ------------- ---------- ------------- Net income $2,314,000 $ 1,366,000 $5,177,000 $ 3,003,000 ========== ============= ========== ============= Denominator for basic and diluted earnings per common share: Denominator for basic earnings per common share - weighted average number of shares outstanding 9,107,817 6,705,004 8,781,028 6,677,166 Dilutive effect of common stock equivalents using the treasury stock method and the average market price for the period 855,063 709,029 804,425 525,162 ---------- ------------- ---------- ------------- Denominator for diluted earnings per common share - weighted average number of shares outstanding and common stock equivalents 9,962,880 7,414,033 9,585,453 7,202,328 ========== ============= ========== ============= Basic earnings per common share: Continuing operations $ 0.25 $ 0.17 $ 0.59 $ 0.42 Discontinued operations -- 0.03 -- 0.03 ---------- ------------- ---------- ------------- Net income $ 0.25 $ 0.20 $ 0.59 $ 0.45 ========== ============= ========== ============= Diluted earnings per common share: Continuing operations $ 0.23 $ 0.15 $ 0.54 $ 0.39 Discontinued operations -- 0.03 -- 0.03 ---------- ------------- ---------- ------------- Net income $ 0.23 $ 0.18 $ 0.54 $ 0.42 ========== ============= ========== =============
Note 8. FINANCING ARRANGEMENTS In conjunction with the acquisition of Minntech on September 7, 2001, the Company entered into new credit facilities to fund the financed portion of the cash consideration paid in the merger and costs associated with the merger, as well as to replace the Company's existing working capital credit facilities. The new credit facilities include (i) a $25,000,000 senior secured amortizing term loan facility from a consortium of U.S. banks (the "Term Loan Facility") used by Cantel to finance a portion of the Minntech acquisition, (ii) a $17,500,000 senior secured revolving credit facility from the U.S. 10 lenders (the "U.S. Revolving Credit Facility") used by Cantel to finance a portion of the Minntech acquisition as well as for future working capital requirements for the U.S. businesses of Cantel, including Minntech and MediVators (the "U.S. Borrowers") and (iii) a $5,000,000 (United States dollars) senior secured revolving credit facility for Carsen (the "Canadian Borrower") with a Canadian bank (the "Canadian Revolving Credit Facility") used for Carsen's future working capital requirements. Each of the Term Loan Facility, the U.S. Revolving Credit Facility and the Canadian Revolving Credit Facility (collectively the "Credit Facilities") expire on September 7, 2006. Borrowings under the Credit Facilities bear interest at rates ranging from .75% to 2.00% above the lender's base rate, or at rates ranging from 2.00% to 3.25% above the London Interbank Offered Rate ("LIBOR"), depending upon the Company's consolidated ratio of debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"). The base rates associated with the U.S. lenders and the Canadian lender were 4.75% and 4.25%, respectively, at June 7, 2002, and the LIBOR rate was approximately 2.0% at June 7, 2002. In order to protect its interest rate exposure, the Company has entered into a three-year interest rate cap agreement covering $12,500,000 of borrowings under the Term Loan Facility, which caps LIBOR on this portion of outstanding borrowings at 4.50%. The Credit Facilities also provide for fees on the unused portion of such facilities at rates ranging from .30% to .50%, depending upon the Company's consolidated ratio of debt to EBITDA. The Term Loan Facility and the U.S. Revolving Credit Facility provide for available borrowings based upon percentages of the U.S. Borrowers' eligible accounts receivable and inventories; require the U.S. Borrowers to meet certain financial covenants; are secured by substantially all assets of the U.S. Borrowers (including a pledge of the stock of Minntech and MediVators owned by Cantel and 65% of the outstanding shares of Carsen stock owned by Cantel); and are guaranteed by Minntech and MediVators. The Canadian Revolving Credit Facility provides for available borrowings based upon percentages of the Canadian Borrower's eligible accounts receivable and inventories; requires the Canadian Borrower to meet certain financial covenants; and is secured by substantially all assets of the Canadian Borrower. On September 7, 2001, the Company borrowed $25,000,000 under the Term Loan Facility and $9,000,000 under the U.S. Revolving Credit Facility in connection with the acquisition of Minntech. At April 30, 2002, the Company had $31,000,000 outstanding under its credit facilities, including $24,000,000 under the Term Loan Facility. Amounts repaid by the Company under the Term Loan Facility may not be re-borrowed. Outstanding borrowings are at interest rates of 3.25% above LIBOR. At June 7, 2002, $12,572,000 was available under the credit facilities. 11 Note 9. INCOME TAXES The consolidated effective tax rate on operations was 37.6% and 41.5% for the nine months ended April 30, 2002 and 2001, respectively. In conjunction with the purchase accounting for the acquisition of Minntech, Cantel reversed the valuation allowances previously existing against its deferred tax assets related to the NOLs accumulated in the United States. Therefore, for all periods subsequent to September 7, 2001, the Company will record in its results of operations income tax expense for its United States subsidiaries at the statutory tax rate; however, actual payment of U.S. Federal income taxes will reflect the benefits of the utilization of the NOLs. For the nine months ended April 30, 2001, income taxes consist primarily of taxes imposed on the Company's Canadian subsidiary. For the nine months ended April 30, 2001, the consolidated effective tax rate was lower than the Canadian effective tax rate of 42.9% due to the fact that income generated by the United States operations was substantially offset by Federal tax benefits resulting from the utilization of NOLs. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS The results of operations reflect primarily the results of Carsen, Minntech and MediVators. Reference is made to (i) the discontinuance of the Company's Consumer Products business, as more fully described in note 6 to the Condensed Consolidated Financial Statements, (ii) the impact on the Company's results of operations of a weaker Canadian dollar against the United States dollar during the three and nine months ended April 30, 2002, compared with the three and nine months ended April 30, 2001 (decrease in value of approximately 3% and 4% for the three and nine months ended April 30, 2002, respectively, based upon average exchange rates), and (iii) the Company's acquisition of Minntech in September 2001, as more fully described in notes 2 and 8 to the Condensed Consolidated Financial Statements. Minntech is reflected in the Company's results of operations for the three months ended April 30, 2002, for the portion of the nine months ended April 30, 2002 subsequent to its acquisition on September 7, 2001, and is not reflected in the results of operations for the three and nine months ended April 30, 2001. Discussion herein of the Company's pre-existing business refers to the operations of Cantel, Carsen and MediVators, but excluding the impact of the Minntech acquisition. 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, 2001 (the "2001 Form 10-K"). 12 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, ---------------------------------------------- ---------------------------------------------- 2002 2001 2002 2001 --------------------- --------------------- --------------------- --------------------- (Dollar amounts in thousands) $ % $ % $ % $ % -------- ------- -------- ------- -------- ------- -------- ------- Dialysis Products $ 14,777 44.5 $ -- -- $ 39,733 45.5 $ -- -- Endoscopy and Surgical Products* 4,995 15.1 5,651 43.5 13,620 15.6 15,001 43.7 Endoscopy Reprocessing Products* 5,108 15.4 3,801 29.3 11,915 13.7 9,407 27.4 Filtration and Separation Products 4,023 12.1 -- -- 10,370 11.9 -- -- Scientific Products 2,354 7.1 2,125 16.4 6,127 7.0 5,707 16.6 Product Service 2,232 6.7 1,559 12.0 6,206 7.1 4,718 13.7 Elimination of intercompany sales of Endoscopy Reprocessing Products (293) (0.9) (160) (1.2) (710) (0.8) (487) (1.4) -------- ------- -------- ------- -------- ------- -------- ------- $ 33,196 100.0 $ 12,976 100.0 $ 87,261 100.0 $ 34,346 100.0 ======== ======= ======== ======= ======== ======= ======== =======
* Endoscopy and Surgical Products was formerly described as Medical Products, and Endoscopy Reprocessing Products was formerly described as Infection Control Products. Net sales increased by $20,220,000, or 155.8%, to $33,196,000 for the three months ended April 30, 2002, from $12,976,000 for the three months ended April 30, 2001. Net sales contributed by Minntech for the three months ended April 30, 2002 were $19,985,000; without the Minntech acquisition, net sales of the Company's pre-existing businesses would have increased by $235,000, or 1.8%, to $13,211,000 for the three months ended April 30, 2002. Net sales increased by $52,915,000, or 154.1%, to $87,261,000 for the nine months ended April 30, 2002, from $34,346,000 for the nine months ended April 30, 2001. Net sales contributed by Minntech for the nine months ended April 30, 2002 were $52,410,000; without the Minntech acquisition, net sales of the Company's pre-existing businesses would have increased by $505,000, or 1.5%, to $34,851,000 for the nine months ended April 30, 2002. Net sales were adversely impacted for the three and nine months ended April 30, 2002, compared with the three and nine months ended April 30, 2001, by approximately $260,000 and $988,000, respectively, due to the translation of Carsen's net sales using a weaker Canadian dollar against the United States dollar. The increase in sales of the Company's pre-existing businesses for the three and nine months ended April 30, 2002 was principally attributable to endoscopy reprocessing products and product service, 13 partially offset by a decrease in sales of endoscopy and surgical products. The increased sales of endoscopy reprocessing products and product service, and the decrease in sales of endoscopy and surgical products, was primarily due to demand. Gross profit increased by $8,318,000, or 172.1%, to $13,150,000 for the three months ended April 30, 2002, from $4,832,000 for the three months ended April 30, 2001. Gross profit contributed by Minntech for the three months ended April 30, 2002 was $8,385,000; without the Minntech acquisition, gross profit of the Company's pre-existing businesses would have decreased by $67,000, or 1.4%, to $4,765,000 for the three months ended April 30, 2002. Gross profit increased by $20,277,000, or 150.1%, to $33,790,000 for the nine months ended April 30, 2002, from $13,513,000 for the nine months ended April 30, 2001. Gross profit contributed by Minntech for the nine months ended April 30, 2002 was $21,215,000; without the Minntech acquisition, gross profit of the Company's pre-existing businesses would have decreased by $938,000, or 6.9%, to $12,575,000 for the nine months ended April 30, 2002. Gross profit as a percentage of sales for the three months ended April 30, 2002 and 2001 was 39.6% and 37.2%, respectively. Minntech's gross profit as a percentage of sales was 42.0% for the three months ended April 30, 2002; without the impact of the Minntech acquisition, gross profit as a percentage of sales for the three months ended April 30, 2002 would have been 36.1%. Gross profit as a percentage of sales for the nine months ended April 30, 2002 and 2001 was 38.7% and 39.3%, respectively. During the nine months ended April 30, 2002, gross profit was adversely impacted by a $427,000 charge to cost of sales related to the sale of inventories which carried a step-up in value recorded as a result of purchase accounting; such charge reduced gross profit percentage by 0.5% for the nine months ended April 30, 2002. Minntech's gross profit as a percentage of sales was 40.5% for the nine months ended April 30, 2002; without the impact of the Minntech acquisition, gross profit as a percentage of sales for the nine months ended April 30, 2002 would have been 36.1%. The lower gross profit percentage from the Company's pre-existing businesses for the three and nine months ended April 30, 2002, as compared with the three and nine months ended April 30, 2001, was primarily attributable to the adverse impact of a weaker Canadian dollar relative to the United States dollar, since the Company's Canadian subsidiary purchases substantially all of its products in United States dollars and sells its products in Canadian dollars; a high gross profit percentage for the three and nine months ended April 30, 2001 due to a buy-in of endoscopes prior to receiving a supplier price increase, a majority of which endoscopes were sold during the three and nine months ended April 30, 2001; and sales mix associated with endoscopy reprocessing products. 14 Selling expenses as a percentage of net sales were 12.0% and 11.9% for the three and nine months ended April 30, 2002, compared with 10.9% and 12.0% for the three and nine months ended April 30, 2001. Without the impact of the Minntech acquisition, selling expenses as a percentage of net sales for the three and nine months ended April 30, 2002 would have been 12.6% and 13.8%, respectively. For the three and nine months ended April 30, 2002, the increase in selling expenses as a percentage of net sales from the Company's pre-existing businesses was primarily attributable to lower than expected sales at Carsen, an increase in personnel at Carsen and an increase in personnel and expanded marketing efforts at MediVators to support domestic sales. General and administrative expenses increased by $2,516,000 to $3,856,000 for the three months ended April 30, 2002, from $1,340,000 for the three months ended April 30, 2001. For the nine months ended April 30, 2002, general and administrative expenses increased by $6,761,000 to $10,709,000, from $3,948,000 for the nine months ended April 30, 2001. General and administrative expenses incurred by Minntech for the three and nine months ended April 30, 2002 were $2,230,000 and $6,252,000, respectively; without the Minntech acquisition, general and administrative expenses of the Company's pre-existing businesses would have increased by $286,000 and $509,000, respectively, for the three and nine months ended April 30, 2002, principally due to the addition of business development personnel and related expenses. Research and development expenses increased by $825,000 to $1,073,000 for the three months ended April 30, 2002, from $248,000 for the three months ended April 30, 2001. For the nine months ended April 30, 2002, research and development expenses increased by $2,036,000 to $2,739,000, from $703,000 for the nine months ended April 30, 2001. Research and development expenses incurred by Minntech for the three and nine months ended April 30, 2002 were $747,000 and $1,810,000, respectively; without the Minntech acquisition, research and development expenses of the Company's pre-existing businesses would have increased by $78,000 and $226,000, respectively, for the three and nine months ended April 30, 2002, principally due to costs related to MediVators' new endoscope reprocessing unit. Interest expense was $586,000 for the three months ended April 30, 2002, compared with interest income of $1,000 for the three months ended April 30, 2001. For the nine months ended April 30, 2002, interest expense was $1,717,000, compared with interest income of $7,000 for the nine months ended April 30, 2001. This change in interest was attributable to the Company's borrowings under its new credit facilities entered into during September 2001 primarily in connection with the Minntech acquisition. Income from continuing operations before income taxes increased by $3,551,000 to $8,299,000 for the nine months ended April 30, 2002, from $4,748,000 for the nine months ended April 30, 2001. 15 The consolidated effective tax rate on operations was 37.6% and 41.5% for the nine months ended April 30, 2002 and 2001, respectively. In conjunction with the purchase accounting for the acquisition of Minntech, Cantel reversed the valuation allowances previously existing against its deferred tax assets related to the NOLs accumulated in the United States. Therefore, for all periods subsequent to September 7, 2001, the Company will record in its results of operations income tax expense for its United States subsidiaries at the statutory tax rate; however, actual payment of U.S. Federal income taxes will reflect the benefits of the utilization of the NOLs. For the nine months ended April 30, 2001, income taxes consist primarily of taxes imposed on the Company's Canadian subsidiary. For the nine months ended April 30, 2001, the consolidated effective tax rate was lower than the Canadian effective tax rate of 42.9% due to the fact that income generated by the United States operations was substantially offset by Federal tax benefits resulting from the utilization of NOLs. LIQUIDITY AND CAPITAL RESOURCES At April 30, 2002, the Company's working capital was $38,054,000, compared with $16,669,000 at July 31, 2001. The increase in working capital was due to the acquisition of Minntech. Net cash provided by operating activities was $4,100,000 and $7,000 for the nine months ended April 30, 2002 and 2001, respectively. For the nine months ended April 30, 2002, the net cash provided by operating activities was primarily due to net income, after adjusting for depreciation and amortization, and a decrease in inventories, partially offset by decreases in accounts payable and accrued expenses and income taxes. For the nine months ended April 30, 2001, the net cash provided by operating activities was primarily due to income from continuing operations, after adjusting for depreciation and amortization, partially offset by an increase in inventories and a decrease in accounts payable and accrued expenses. Net cash used in investing activities was $30,142,000 for the nine months ended April 30, 2002 compared with net cash provided by investing activities of $1,597,000 for the nine months ended April 30, 2001. For the nine months ended April 30, 2002, the net cash used in investing activities was primarily due to the acquisition of Minntech and capital expenditures. For the nine months ended April 30, 2001, the net cash provided by investing activities was primarily due to proceeds from the discontinued operations, partially offset by purchases of available-for-sale securities. Net cash provided by financing activities was $29,901,000 and $44,000 for the nine months ended April 30, 2002 and 2001, respectively. For the nine months ended April 30, 2002, the net cash provided by financing activities was primarily attributable to borrowings under the Company's new credit facilities related to the 16 Minntech acquisition, net of related debt issuance costs. In conjunction with the acquisition of Minntech on September 7, 2001, the Company entered into new credit facilities to fund the financed portion of the cash consideration paid in the merger and costs associated with the merger, as well as to replace the Company's existing working capital credit facilities. The new credit facilities include (i) a $25,000,000 senior secured amortizing term loan facility from a consortium of U.S. banks (the "Term Loan Facility") used by Cantel to finance a portion of the Minntech acquisition, (ii) a $17,500,000 senior secured revolving credit facility from the U.S. lenders (the "U.S. Revolving Credit Facility") used by Cantel to finance a portion of the Minntech acquisition as well as for future working capital requirements for the U.S. businesses of Cantel, including Minntech and MediVators (the "U.S. Borrowers") and (iii) a $5,000,000 (United States dollars) senior secured revolving credit facility for Carsen (the "Canadian Borrower") with a Canadian bank (the "Canadian Revolving Credit Facility") used for Carsen's future working capital requirements. Each of the Term Loan Facility, the U.S. Revolving Credit Facility and the Canadian Revolving Credit Facility (collectively the "Credit Facilities") expire on September 7, 2006. Borrowings under the Credit Facilities bear interest at rates ranging from .75% to 2.00% above the lender's base rate, or at rates ranging from 2.00% to 3.25% above the London Interbank Offered Rate ("LIBOR"), depending upon the Company's consolidated ratio of debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"). The base rates associated with the U.S. lenders and the Canadian lender were 4.75% and 4.25%, respectively, at June 7, 2002, and the LIBOR rate was approximately 2.0% at June 7, 2002. In order to protect its interest rate exposure, the Company has entered into a three-year interest rate cap agreement covering $12,500,000 of borrowings under the Term Loan Facility, which caps LIBOR on this portion of outstanding borrowings at 4.50%. The Credit Facilities also provide for fees on the unused portion of such facilities at rates ranging from .30% to .50%, depending upon the Company's consolidated ratio of debt to EBITDA. The Term Loan Facility and the U.S. Revolving Credit Facility provide for available borrowings based upon percentages of the U.S. Borrowers' eligible accounts receivable and inventories; require the U.S. Borrowers to meet certain financial covenants; are secured by substantially all assets of the U.S. Borrowers (including a pledge of the stock of Minntech and MediVators owned by Cantel and 65% of the outstanding shares of Carsen stock owned by Cantel); and are guaranteed by Minntech and MediVators. The Canadian Revolving Credit Facility provides for available borrowings based upon percentages of the Canadian Borrower's eligible accounts receivable and inventories; requires the Canadian Borrower to meet certain financial covenants; and is secured by substantially all assets of the Canadian Borrower. 17 On September 7, 2001, the Company borrowed $25,000,000 under the Term Loan Facility and $9,000,000 under the U.S. Revolving Credit Facility in connection with the acquisition of Minntech. At April 30, 2002, the Company had $31,000,000 outstanding under its credit facilities, including $24,000,000 under the Term Loan Facility. Amounts repaid by the Company under the Term Loan Facility may not be re-borrowed. Outstanding borrowings are at interest rates of 3.25% above LIBOR. The Company believes that its current cash position, anticipated cash flow from operations and the funds available under the new revolving credit facilities will be sufficient to satisfy the Company's cash operating requirements for its existing operations for the foreseeable future. At June 7, 2002, $12,572,000 was available under the credit facilities. For the nine months ended April 30, 2002, compared with the nine months ended April 30, 2001, the average value of the Canadian dollar decreased by 4% relative to the value of the United States dollar. Changes in the value of the Canadian dollar against the United States dollar affects the Company's results of operations because the Company's Canadian subsidiary purchases substantially all of its products in United States dollars and sells its products in Canadian dollars. Such currency fluctuations also result in a corresponding change in the United States dollar value of the Company's assets that are denominated in Canadian dollars. Under the Canadian Revolving Credit Facility, Carsen has a $20,000,000 (United States dollars) foreign currency hedging facility which is available to be used to hedge against the impact of such currency fluctuations on the purchases of inventories. Total commitments for foreign currency forward contracts amounted to $14,232,000 (United States dollars) at June 7, 2002 and cover a portion of Carsen's projected purchases of inventories through January 2003. The weighted average exchange rate of the forward contracts open at June 7, 2002 was $1.5873 Canadian dollar per United States dollar, or $.6300 United States dollar per Canadian dollar. The exchange rate published by the Wall Street Journal on June 7, 2002 was $1.5330 Canadian dollar per United States dollar, or $.6523 United States dollar per Canadian dollar. For purposes of translating the balance sheet, at April 30, 2002 compared with July 31, 2001, the value of the Canadian dollar decreased by 2% relative to the value of the United States dollar. This decrease in the value of the Canadian dollar caused the majority of the $241,000 increase in the negative cumulative foreign currency translation adjustment at April 30, 2002 compared to July 31, 2001, thereby decreasing stockholders' equity. 18 Inflation has not significantly impacted the Company's operations. Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. All forward-looking statements involve risks and uncertainties, including, without limitation, acceptance and demand of new products, the impact of competitive products and pricing, the Company's ability to successfully integrate and operate acquired and merged businesses and the risks associated with such businesses, and the risks detailed in the Company's filings and reports with the Securities and Exchange Commission. Such statements are only predictions, and actual events or results may differ materially from those projected. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK. Foreign currency market risk: A substantial portion of the Company's products are imported from the Far East and Western Europe, and the Company's United States subsidiaries sell a portion of their products outside of the United States. Consequently, the Company's business could be materially and adversely affected by the imposition of trade barriers, fluctuations in the rates of exchange of various currencies, tariff increases and import and export restrictions, affecting the United States and Canada. Carsen pays for a substantial portion of its products in United States dollars, and Carsen's business could be materially and adversely affected by the imposition of trade barriers, fluctuations in the rates of currency exchange, tariff increases and import and export restrictions between the United States and Canada. Additionally, Carsen's financial statements are translated using the accounting policies described in Note 2 to the Consolidated Financial Statements included within the Company's 2001 Form 10-K. Fluctuations in the rates of currency exchange between the United States and Canada had an adverse impact for the three and nine months ended April 30, 2002, compared with the three and nine months ended April 30, 2001, upon the Company's results of operations and stockholders' equity, as described in Management Discussion and Analysis of Financial Condition and Results of Operations. Interest rate market risk: The Company has two credit facilities for which the interest rate on outstanding borrowings is variable. Therefore, interest expense is principally affected by the general level of interest rates in the United States and Canada. In order to protect its interest rate exposure, the Company has entered into a three-year interest rate cap covering $12,500,000 of borrowings under the Term Loan Facility, which caps LIBOR on this portion of outstanding borrowings at 4.50%. 19 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, 2002. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - none. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the three months ended April 30, 2002. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CANTEL MEDICAL CORP. Date: June 13, 2002 By: /s/ James P. Reilly ------------------- James P. Reilly, President and Chief Executive Officer (Principal Executive Officer) By: /s/ Craig A. Sheldon -------------------- Craig A. Sheldon, Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 21 -----END PRIVACY-ENHANCED MESSAGE-----