PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND SEPTEMBER 30, 1994
ASSETS
(Unaudited)
December 31, September 30,
1993 1994
CURRENT ASSETS:
Cash and temporary cash investment $ 495,000 $ 786,000
Marketable securities 21,810,000 20,361,000
Accounts receivable, net of allowance of
$555,000 in 1993, and $605,000 in 1994 14,803,000 15,930,000
Inventories 17,632,000 17,296,000
Prepaid expenses and other assets 3,634,000 3,763,000
Total current assets 58,374,000 58,136,000
PROPERTY, PLANT, AND EQUIPMENT,
at cost, net of accumulated depreciation
and amortization 25,580,000 30,577,000
OTHER ASSETS, at cost, net of accumulated
amortization 3,591,000 3,455,000
Total assets 87,545,000 $ 92,168,000
The accompanying notes are an integral part of
these consolidated statements.
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CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND SEPTEMBER 30, 1994
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
December 31, September 30,
1993 1994
CURRENT LIABILITIES:
Accounts payable 2,822,000 3,774,000
Accrued liabilities 5,313,000 5,911,000
Customer deposits 392,000 473,000
Income taxes payable 886,000
Total current liabilities 8,527,000 11,044,000
NONCURRENT LIABILITIES
Deferred income taxes 3,827,000 3,741,000
Capital lease obligation and other 627,000 372,000
Total noncurrent liabilities 4,454,000 4,113,000
COMMITMENTS
SHAREHOLDERS' EQUITY
Preferred stock, $ .01 par value:
1,000,000 shares authorized, none
outstanding
Common stock; $ .01 par value:
50,000,000 shares authorized;
7,788,494 and 7,862,783 outstanding
at December 31, 1993 and September 58,799,000 58,561,000
Unrealized losses on Marketable Securitie (171,000)
Cumulative translation adjustment (193,000) (137,000)
Retained earnings 15,958,000 18,758,000
Total shareholders' equity 74,564,000 77,011,000
Total liabilities and shareholders'
equity $ 87,545,000 $ 92,168,000
The accompanying notes are an integral part of
these consolidated statements.
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CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
1993 1994 1993 1994
<S> <C> <C> <C> <C>
NET SALES 22,450,000 22,469,000 65,062,000 65,232,000
COST OF SALES 10,806,000 10,863,000 30,220,000 31,102,000
GROSS PROFIT 11,644,000 11,606,000 34,842,000 34,130,000
OPERATING EXPENSES:
Research and development 1,920,000 1,953,000 5,941,000 5,946,000
Selling, general and administ 8,368,000 8,016,000 25,336,000 24,262,000
Total operating expenses 10,288,000 9,969,000 31,277,000 30,208,000
INCOME FROM OPERATIONS 1,356,000 1,637,000 3,565,000 3,922,000
Interest income, net 141,000 127,000 421,000 378,000
Other income (expense), net 17,000 (41,000) 41,000 (53,000)
INCOME BEFORE PROVISION FOR INCOME
TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 1,514,000 1,723,000 4,027,000 4,247,000
Provision for income taxes 529,000 601,000 1,409,000 1,447,000
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 985,000 1,122,000 2,618,000 2,800,000
Cumulative effect of accounti - - 204,000 -
NET INCOME $ 985,000 $ 1,122,000 $ 2,822,000 $ 2,800,000
Earnings per Common Share and Common Equivalent Share:
Earnings Before Cumulative Effect Of
Accounting Change $ 0.12 $ 0.14 $ 0.32 $ 0.34
Cumulative effect of accounti - - 0.03 -
Net Earnings Per Share $ 0.12 $ 0.14 $ 0.35 $ 0.34
Weighted average number of share 8,113,671 8,115,206 8,158,433 8,116,708
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
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CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES 1993 1994
Net income 2,822,000 2,800,000
Adjustments to reconcile net
income to cash provided from (used in)
operating activities:
Cumulative effect of accounting change (204,000)
Depreciation and amortization 1,652,000 1,659,000
Deferred income taxes 1,017,000 (86,000)
Change in assets and liabilities:
Accounts receivable, net (35,000) (1,127,000)
Inventories 318,000 336,000
Prepaid and other assets (1,043,000) (129,000)
Other assets (352,000) 56,000
Accounts payable (118,000) 952,000
Accrued liabilities 307,000 598,000
Income taxes payable 173,000 573,000
Customer deposits 38,000 81,000
Other long term liabilities 350,000 (255,000)
Total adjustments 2,103,000 2,658,000
Net cash provided from operating activiti 4,925,000 5,458,000
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CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
(Unaudited) (Unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES 1993 1994
Investments in marketable securiti 478,000 1,278,000
Purchases of plant and equipment (4,759,000) (6,576,000)
Cumulative translation adjustment (155,000) 56,000
Net cash used in investing activities (4,436,000) (5,242,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued under stock option plan 121,000 416,000
Common stock repurchased (654,000)
Tax benefit from exercise of stock option 183,000 313,000
Net cash provided from financing activities 304,000 75,000
Net decrease in cash and cash investments 793,000 291,000
Cash and cash investments, beginning
of period 559,000 495,000
Cash and cash investments, end of per $ 1,352,000 $ 786,000
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 63,000 $ 46,000
Cash paid for income taxes $ 1,045,000 $ 445,000
The accompanying notes are an integral part of
these consolidated statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1994
General
The accompanying condensed consolidated financial statements
include the accounts of Circon Corporation (the Company) and its
subsidiaries, Circon GmbH (a German corporation), Circon Canada
Inc. (a Canadian corporation) and Circon Export Corporation,
which operates as a Foreign Sales Corporation (FSC) under
federal income tax laws. All significant intercompany
transactions and accounts have been eliminated in consolidation.
The condensed consolidated financial statements included
herein have been prepared by the Company, without audit, in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. It is suggested that
these condensed consolidated financial statements be read in
conjunction with the statements and notes thereto included in
the Company's annual report for the year ended December 31, 1993.
The information reflects all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial
position and the results of operations for the interim periods.
The results for the interim periods are not necessarily
indicative of the results expected for any other period or for
the entire year.
(1) Inventories
Inventories include costs of materials, labor and
manufacturing overhead. Inventories are priced at the lower of
cost (first-in, first-out) or market and are summarized as
follows:
(Unaudited)
December 31, September 30,
1993 1994
Raw materials $ 4,402,000 $ 2,694,000
Work in process 9,472,000 12,293,000
Finished goods 3,758,000 2,309,000
$17,632,000 $17,296,000
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(2) Marketable Securities
Marketable securities are stated at the lower of cost or market
value and consist of the following:
(Unaudited)
December 31, September 30,
1993 1994
Municipal obligations 17,527,000 16,309,000
Mutual bond funds 1,000,000 -
Preferred stock of utility
companies 3,080,000 2,964,000
Other 203,000 1.088,000
$ 21,810,000 $ 20,361,000
Interest income on the above marketable securities was $213,000
for the three months ending September 30, 1994.
(3) Notes Payable
The Company has available an unsecured revolving credit line
for $15 million, with an interest rate of the bank's prime rate,
or 1.5 points over an offshore rate. Terms of the banking
arrangement restrict payment of dividends, and require the
achievement of certain profitability levels and financial
ratios. In addition, the bank agreement contains certain
subjective acceleration clauses related to the Company's
financial conditions and operations.
(4) Income Taxes
In January 1993, the Company adopted Financial Accounting
Standard No. 109, "Accounting for Income Taxes".
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ITEM 2. Management's Discussion and Analysis of Operations and
Financial Condition
RESULTS OF OPERATIONS
Three Months Ended September 30, 1994
Compared to Three Months Ended September 30, 1993
Sales
Sales for the third quarter 1994 were $22.5 million, slightly
above the third quarter 1993 and were the highest of any quarter.
Worldwide medical sales were up 2% when compared to the third
quarter of 1993. OEM and industrial sales decreased 18% between
periods.
The Company estimates that price increases of 1% are included
in total sales between the third quarter 1994 and the third
quarter 1993.
During the past year, the U.S. healthcare reform debate has
caused hospitals to stretch out orders. We have focused on
maintaining market share in our current markets and believe that
the three consecutive quarters of sales and income growth
validate our strategy.
Gross Profit
Gross profit for the third quarter totalled $11.6 million,
level with the comparable 1993 quarter. Gross profit was 51.7%
of sales.
As a percentage of sales, gross profit has maintained a
reasonable level since early 1993 when healthcare reform
initiatives began.
Operating Expenses
Total operating expenses of $10.0 million for the third quarter
1994 were down 3% or $0.3 million from the same period in 1993.
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Expenditures for R&D were $2.0 million for the third quarter,
up 2% from the third quarter of 1993. R&D expenditures remain
at the desired level of about 9% of sales. Development efforts
focused on products for our primary markets of urology,
gynecology, laparoscopy and thoracoscopy.
Selling, general and administrative expenses were down 4% to
$8.0 million for the third quarter. Intensive efforts have been
made to prioritize sales and marketing expenditures, capitalize
on market opportunities and maintain our strong sales
organization, while reducing overall expense levels.
Income
Third quarter 1994 net income of $1.1 million and operating
income of $1.6 million were up from $1.0 million and $1.4
million, respectively, in the third quarter 1993. Earnings per
share was $0.14 compared to $0.12 in 1993. The improved
operating performance was achieved primarily through control of
operating expenses.
Interest income and other expense totalled $86,000 in the third
quarter 1994 compared to $158,000 in the same 1993 period.
Interest income of $196,000 decreased $15,000 from prior year
and losses on marketable securities were $69,000 as compared to
a $49,000 loss in 1993. Other income and expense included
$30,000 net foreign exchange loss compared to $13,000 gain in
the third quarter 1993.
Nine Months Ended September 30, 1994
Compared to Nine Months Ended September 30, 1993
Sales
Sales of $65.2 million for the first nine months of 1994 are
slightly favorable to $65.1 million for the same 1993 period,
and were the highest of any first nine month period.
U.S. medical and international sales were flat compared to 1993
while sales to OEM and industrial customers were up 6% over the
same period.
The economic slowdowns in most European countries and Japan and
healthcare reform in this country have had a negative impact on
Circon's business.
The Company estimates that price increases of 2% are included
in total sales between the nine months of 1994 and 1993.
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Gross Profit
Gross profit was $34.1 million for nine months 1994 compared to
$34.8 million for the same 1993 period. Circon's gross profit
level of 52.3% of sales for the period demonstrates the basic
profitability of our products resulting from excellent product
quality and efficient manufacturing.
Operating Expenses
Total operating expenses of $30.2 million for the first nine
months 1994 were down 3% or $1.1 million from the same 1993
period. Steps have been taken, throughout the nine month
period, to bring Circon's expenditures into line with medium
term sales expectations.
R&D expenditures were $5.9 million, essentially level in the
nine month comparison. Development efforts continue toward
expanding the products offered to our primary markets of
urology, gynecology, laparoscopy and thoracoscopy. Circon's
sustained development efforts will result in over forty new
products being introduced by the end of 1994. In addition, we
are improving capabilities to design and manufacture hand
instruments for our primary markets.
Intensive efforts have been made to prioritize marketing
expenditures to capitalize on market opportunities and maintain
our strong sales organization while still reducing overall
expense levels. Selling, general and administrative expenses
totalled $24.3 million for the first nine months of 1994, down
4% from last year.
Income
Net income totalled $2.8 million and earnings per share were
$0.34 in the first nine months 1994. This was essentially flat
compared to the same 1993 period while operating income was $3.9
million compared to $3.6 million in the 1993 period.
Circon adopted SFAS 109 in the first quarter 1993, resulting in
a one time $0.2 million increase in net income, recorded as a
cumulative effect of accounting change.
Interest income and other income and expense for the first nine
months totalled $325,000 compared to $462,000 in 1993. Other
income and expense included a $31,000 loss on net foreign
exchange compared to a $40,000 gain in 1993, and recognition of
$174,000 of realized and unrealized losses on marketable
securities as compared to $126,000 of losses in 1993.
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LIQUIDITY AND CAPITAL RESOURCES
In September 1994, the Company amended the bank credit
agreement entered into in June 1993 for a $15.0 million
revolving credit line to extend the maturity date to 1996. The
credit agreement includes annual renewals after that time.
As of September 30, 1994, the Company had cash and marketable
securities totalling $21.1 million. The Company is using
approximately $10.0 million to construct a new facility in Santa
Barbara, California, three fourths of which has already been
funded. The building will be occupied in January, 1994
coterminous with the lease expiring on the building that is
currently being occupied by the corporate headquarters. Once
the facility is complete, the Company may consider a sale, lease
back or other financing arrangement.
Non-cash charges for depreciation and amortization aggregated
to $1.7 million for the first nine months of 1994. $6.6 million
was used to purchase plant and equipment (net of retirements).
See Consolidated Statements of Cash Flows and related Notes.
The Company believes that cash flow from operations, existing
cash and marketable securities, and available cash from bank
credit arrangements are adequate to fund the Company's existing
operations for the foreseeable future.
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PART III. OTHER INFORMATION
ITEM 4. Submission of Matters to a vote of Security Holders
The Annual Meeting of Shareholders was held on July 7, 1994.
The following table shows voting information for each item voted
upon:
Proposal Voting Tabulation
Election of Directors
Nominee For Withhold/Against Broker Non-Vote
Richard A. Auhll 6,750,997 31,625 644,602
Paul W. Hartloff, Jr. 6,750,997 31,625 644,602
For Against Abstain Broker Non-Vote
Ratification of Selection
of Auditors 6,688,385 10,830 83,407 644,602
The total number of shares of Circon Corporation Common Stock
outstanding as of May 11, 1994, the record date for the Annual
Meeting, was 7,825,689.
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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.
CIRCON CORPORATION
Registrant
November 14, 1994
Date RICHARD A. AUHLL
President
Chief Executive Officer
November 14,1994
Date R. BRUCE THOMPSON
Executive Vice President
Chief Financial Officer
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