FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR QUARTER ENDED September 30, 1995 COMMISSION FILE NO. 0-12025
CIRCON CORPORATION
(Exact Name of Registrant as Specified in Its Charte
Delaware 95-3079904
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6500 Hollister Avenue, Santa Barbara, California 93117-3019
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (805) 685-5100
Indicate by check mark whether the 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 twelve
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Number of Common Shares Outstanding at September 30, 1995: 12,335,561
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND SEPTEMBER 30, 1995
ASSETS
(Unaudited) (Unaudited)
December 31, September 30,
1994 1995
CURRENT ASSETS:
Cash and temporary cash investment $ 2,883,000 $ 3,902,000
Marketable securities 21,033,000 19,871,000
Accounts receivable, net of allowance of
$1,499,000 in 1994, and $1,837,000 in 1995 26,769,000 27,731,000
Inventories 29,933,000 33,904,000
Prepaid expenses and other assets 3,603,000 2,517,000
Deferred tax asset - current 5,946,000 6,462,000
------------ ----------
Total current assets 90,167,000 94,387,000
PROPERTY, PLANT, AND EQUIPMENT,
at cost, net of accumulated depreciation
and amortization 52,194,000 49,181,000
OTHER ASSETS:
Other, at cost, net of accumulated
amortization 41,549,000 38,074,000
----------- -----------
Total assets 183,910,000 $ 181,642,000
=========== ===========
The accompanying notes are an integral part of
these consolidated statements.
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND SEPTEMBER 30, 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited) (Unaudited)
December 31, September 30,
1994 1995
CURRENT LIABILITIES:
Accounts payable 4,309,000 7,410,000
Accrued liabilities 11,816,000 13,069,000
Accrued interest 1,665,000 503,000
Short term borrowings 349,000 -
Current portion of long term debt 726,000 605,000
Customer deposits 473,000 502,000
---------- ----------
Total current liabilities 19,338,000 22,089,000
NONCURRENT LIABILITIES
Long term debt 72,237,000 71,430,000
Deferred income taxes 4,537,000 4,625,000
Capital lease obligations and other 684,000 472,000
---------- ----------
Total noncurrent liabilities 77,458,000 76,527,000
SHAREHOLDERS' EQUITY
Preferred stock, $ .01 par value:
1,000,000 shares authorized, none
outstanding
Common stock; $ .01 par value:
50,000,000 shares authorized;
12,250,127 and 12,335,561 outstanding
at December 31, 1994 and September
30, 1995 12,000 12,000
Net receivable from officer (272,000) -
Cumulative translation adjustment (341,000) 254,000
Retained deficit (1,836,000) (8,201,000)
----------- -----------
Total shareholders' equity 87,114,000 83,026,000
Total liabilities and shareholders'
equity $ 183,910,000 $ 181,642,000
=========== ===========
The accompanying notes are an integral part of
these consolidated statements.
<TABLE>
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited) (Unaudited) (Unaudited)(Unaudited)
1994 1995 1994 1995
<S> <C> <C> <C> <C>
NET SALES $ 39,676,000 $ 42,113,000 $ 115,621,000 121,867,000
COST OF SALES 17,691,000 18,635,000 50,108,000 55,387,000
Non-Recurring business integration exp. - 4,212,000 - 4,212,000
---------- ---------- ---------- -----------
GROSS PROFIT 21,985,000 19,266,000 65,513,000 62,268,000
OPERATING EXPENSES:
Research and development 3,105,000 2,867,000 9,434,000 8,433,000
Selling, general and administrative 15,174,000 15,556,000 46,502,000 48,856,000
Non-Recurring business integration exp. - 4,221,000 - 4,221,000
Reversal of Cabot restructuring charge - - - (188,000)
---------- ---------- ---------- ----------
Total operating expenses 18,279,000 22,644,000 55,936,000 61,322,000
INCOME ( LOSS) FROM OPERATIONS 3,706,000 (3,378,000) 9,577,000 946,000
Non-Recurring transaction costs - (4,936,000) - (4,936,000)
Interest expense, net (1,260,000) (1,245,000) (3,818,000) (3,424,000)
Other income (expense), net (28,000) 54,000 (11,000) 47,000
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES 2,418,000 (9,505,000) 5,748,000 (7,367,000)
Provision (benefit) for income taxes 725,000 (2,131,000) 1,377,000 (959,000)
NET INCOME (LOSS) $ 1,693,000 $ (7,374,000) $ 4,371,000 $(6,408,000)
========= =========== ========= ===========
Net Earnings Per Share $ 0.14 $ (0.56) $ 0.35 $ (0.49)
Weighted average number of shares outstanding 12,494,356 13,197,510 12,630,075 13,034,095
The accompanying notes are an integral part of
these consolidated statements.
</TABLE>
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES 1994 1995
Net income (loss) 4,371,000 (6,408,000)
Adjustments to reconcile net
income to cash provided from (used in)
operating activities:
Depreciation and amortization 3,899,000 9,079,000
Deferred income taxes 73,000 88,000
Change in assets and liabilities:
Accounts receivable, net (382,000) (962,000)
Inventories (1,078,000) (3,971,000)
Prepaid and other assets (843,000) 1,086,000
Other assets 714,000 857,000
Accounts payable 1,063,000 3,101,000
Accrued liabilities 306,000 1,253,000
Customer deposits 81,000 29,000
Accrued Interest (1,256,000) (1,162,000)
Other long term liabilities (255,000) (212,000)
------------ -----------
Total adjustments 2,322,000 9,186,000
Net cash provided from operating activiti 6,693,000 2,778,000
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
(Unaudited) (Unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES 1994 1995
Investments in marketable securiti 175,000 1,444,000
Purchases of plant and equipment (8,452,000) (3,921,000)
Short term borrowing (25,000) (470,000)
Long term borrowing (217,000) (807,000)
Cumulative translation adjustment 56,000 595,000
------------- -------------
Net cash used in investing activities (8,463,000) (3,159,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued under stock option pl 743,000 1,128,000
Common stock repurchased (654,000) -
Retirement of treasury stock (1,827,000) -
Net receivable from officer (272,000) 272,000
Tax benefit from exercise of stock option 408,000 -
------------ -----------
Net cash provided from (used in) financin (1,602,000) 1,400,000
------------ -----------
Net increase (decrease) in cash and cash (3,372,000) 1,019,000
Cash and cash investments, beginning
of period 4,760,000 2,883,000
--------- ---------
Cash and cash investments, end of period $ 1,388,000 $ 3,902,000
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 5,277,000 $ 5,283,000
========= =========
Cash paid for income taxes $ 1,082,000 $ 948,000
========= =========
The accompanying notes are an integral part of
these consolidated statements.
CIRCON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
General
The accompanying condensed consolidated financial statements include
the accounts of Circon Corporation (the Company) and its subsidiaries, Cabot
Medical (a U.S. corporation), 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, 1994, and Form S-4 filed in connection with the
Cabot business combination.
The information reflects all adjustments (consisting only of normal
recurring adjustments and the restatement for the Cabot business combination)
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.
Certain reclassifications have been made to prior period financial statements to
conform to the current period presentation. The results for the interim periods
are not necessarily indicative of the results expected for any other period or
for the entire year.
Note 1 Cabot Business Combination
On August 28, 1995, the Company issued 4,339,302 shares of its common
stock for all the outstanding shares of Cabot Medical Corporation ("Cabot").
The merger has been accounted for as a pooling-of-interests and,
accordingly, the Company's consolidated financial statements have been restated
for all periods prior to the merger to include the results of operations,
financial position, and cash flows of Cabot.
In connection with the merger, approximately $13.4 million (pre-tax)
of merger costs and non-recurring combination expenses were incurred and have
been charged to expense in the three months ended September 30, 1995. These
costs include $8.4 million associated with the elimination of duplicative,
excess, obsolete inventories and related production equipment, and reorganizing
and cross training the sales force, and $4.9 million of fees and other expenses
specifically associated with the merger process.<PAGE>
Separate results of
the combined entities for the three months and nine months ended
September 30, 1994 and the six months ended June 30, 1995 are as follows:
<TABLE>
Three Months Ended Nine Months Ended Six Months Ended
September 30, 1994 September 30, 1994 June 30, 1995
(000's) (000's) (000's)
Net Sales
<S> <C> <C> <C>
Circon $ 22,469 $ 65,232 $ 48,410
Cabot 17,207 50,389 31,344
--------- -------- --------
39,676 115,621 79,754
========= ========= =========
Net Income
Circon $ 1,122 $ 2,800 $ 2,946
Cabot 672 1,872 (1,465)
Adjustments (101) (301) (730)
--------- --------- ---------
1,693 4,371 751
========= ========= =========
</TABLE>
The adjustments are required to retroactively conform Circon's accounting for
demonstration equipment to Cabot's accounting policy.
Note 2 Earnings per share
Earnings per common share and common equivalent share have been
computed by dividing net income by the weighted average number of shares of
common stock and common stock equivalents outstanding during the year. The
number of common shares was increased for the dilutive effect of shares issuable
upon the exercise of warrants and stock options. Shares issuable upon
conversion of the Company's 7.50% Convertible Subordinated Notes due
March 1, 1999 (note 4) are excluded from the per share computations as they are
not common stock equivalents and are antidilutive.
Note 3 Inventory
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) (Unaudited)
December 31, September 30,
1994 1995
Raw materials $ 9,068 $ 12,205
Work in process 10,180 12,992
Finished goods 10,685 8,707
-------- --------
Total $ 29,933 $ 33,904
======== ========
Note 4 Credit Facility
In September 1994, the Company extended its $15.0 million revolving
bank credit line. The agreement matures in May 1996 and includes annual
renewals after that time.
On August 28, 1995, Circon merged with Cabot Medical Corporation in
a stock-for-stock transaction. As a result of this merger, Circon is preparing
to refinance Cabot's $67 million convertible subordinated notes, assuming that
75 % of the current note holders will vote to "put" their notes back to Circon.
The vote by note holders should be completed by the end of November 1995.
Accordingly, a new revolving bank credit line for $75.0 million has been
arranged.
This new credit line will replace the $15.0 million credit line
discussed above. The agreements for the $75.0 million credit line have been
finalized and funding for the note, if necessary, should occur in late November
or early December 1995.ITEM 2. Management's Discussion and Analysis of
Operations and Financial Condition
RESULTS OF OPERATIONS
General
On August 28, 1995, Circon Corporation acquired Cabot Medical
Corporation. This report presents Circon and Cabot for the entire quarter and
for past periods as if they had always been merged, which is required under
pooling of interest accounting rules.
All Cabot Medical Common Shares have been converted into Circon Common
Shares at a ratio of 0.415 shares of Circon for each share of Cabot.
In the process of merging, Circon and Cabot incurred one-time business
integration merger expenses totalling $13.4 million pre-tax and $9.8 million
after tax which are reflected in the third quarter.
A total of $8.4 million of one-time expenses associated with eliminating
duplicative, excess, obsolete inventories and related production equipment,
and reorganizing and cross training the sales force, are noted in the
appropriate cost and expense categories as a business integration expense.
The $4.9 million of fees and other expenses specifically associated with the
merger process are noted as non-recurring transaction costs.
The nine months include the above mentioned $13.4 million pre-tax and a
$0.2 million reversal of previously expensed restructuring charges by Cabot
Medical.
Three Months Ended September 30, 1995
Compared to Three Months Ended September 30, 1994
Sales
Total sales for the third quarter of Circon including Cabot were up $2.4
million over the third quarter 1994 to $42.1 million, even though the entire
sales organization was out of the field in training for more than two weeks.
The ACMI and Video divisions sales were up 14%, led by a 43% increase in the
international sector. Cabot's third quarter sales were down 5% from the
comparable 1994 quarter, but continue to increase from the low of the first
quarter 1995.
Price increases were negligible between the 1995 and 1994 third quarters,
therefore, all of the sales increase related to volume.
Gross Profit
In order to provide perspective as to Circon's operating performance, the
following discussion of gross profit and operating expenses exclude one-time
business integration/merger expenses and compares combined results for both
1994 and 1995.
Gross profit totalled $23.5 million, up $1.5 million for the quarter. As
a percent of sales, third quarter gross profit was a healthy 56%. Pricing has
stabilized and manufacturing efficiencies are being achieved as a result of
higher production volumes.
Operating Expenses
Combined operating expenses for the third quarter were up only $0.1
million over last year while sales increased $2.4 million.
Total expenses as a percentage of sales are down to 43.7% in the third
quarter 1995 from 46.0% for the comparable 1994 period. R&D expenditures
totalled $2.9 million for the third quarter 1995, down 8% from the same 1994
quarter, yet remain a healthy 7% of sales.
Selling, general and administrative expenses of $15.6 million for the
third quarter 1995 are up 3.0% compared to $15.2 million for 1994, but are up
less than the percentage sales growth for the period. Increased sales
commissions and marketing expenses associated with new products are the major
contributors to the expense increase.
Income from Operations
Combined operating income was up 36% to $5.1 million for the third
quarter 1995. Operating income for the ACMI and Video operations was up 141%
for the quarter, continuing the strong operating performance seen throughout
1995.
Interest Income and Expense
Net interest expense for the third quarter 1995 totalled $1.2 million,
down slightly from the $1.3 million for the comparable 1994 period due
to increased interest income offsetting some of Cabot's interest expense.
Net Income
As a result of items discussed above, third quarter 1995 net income,
excluding one-time charges, totalled $2.5 million or $0.19 per share compared
to $1.7 million or $0.14 per share for the 1994 period.
Nine Months Ended September 30, 1995
Compared to Nine Months Ended September 30, 1994
Sales
Sales of $121.9 million for the nine months of 1995 compare favorably to
$115.6 million for the same 1994 period.
Combined international sales are up over 30% in both the third quarter
and nine months of 1995, primarily due to our outstanding new products and
increased market penetration.
All growth in the nine months of 1995 compared to 1994 has come from
increased volume as price increases between the period have been negligible.
Gross Profit
In order to provide perspective as to Circon's operating performance,
the following discussion of gross profit and operating expenses exclude
one-time business integration/merger and restructuring expenses and compares
combined results for both 1994 and 1995.
Gross profit for nine months was $66.5 million, up $1.0 million from the
comparable 1994 period. The higher production volumes resulting in
manufacturing efficiencies and increasing gross profit percentages in the ACMI
and Video divisions have been offset by profit erosion in Cabot. Gross profit
percentage for the nine months of 1995 is 54.6%.
Operating Expenses
Operating expenses totalled $57.3 million, up only $1.4 million or 2.4%
over the 1994 period. Total expenses as a percentage of sales are down to
47.0% for the nine months of 1995 from 48.4% for the comparable 1994 period.
R&D expenditures totalled $8.4 million for the nine months 1995, down
from the $9.4 million of the comparable 1994 period, but still a healthy 7.0%
of sales.
Selling, general and administrative expenses for nine months 1995 were up
$2.4 million or 5.1% to $48.9 million. Commissions have increased due to
higher sales levels, and marketing expenses associated with new product
introductions are up, both contributing to the expense increase.
Operating Income
Operating income for 1995 totalled $9.2 million, down 4.0% from the
comparable nine month 1994 period. The strong operating performance of the
ACMI and Video divisions continued, increasing 103% for nine months 1995
compared to 1994. Cabot's operating income has been improving since the first
quarter of 1995 and reached $2.1 million for the nine months compared to $6.1
million for the 1994 period.
Interest Income and Expense
Net interest expense for the nine months 1995 totalled $3.4 million, down
10% from the 1994 period, due to increased interest income offsetting Cabot's
interest expense.
Net Income
As a result of the items discussed above, net income for the nine months
1995 totalled $3.4 million or $0.26 per share compared to $4.4 million or
$0.35 per share for the 1994 period.
LIQUIDITY AND CAPITAL RESOURCES
In September 1994, the company extended its $15.0 million revolving bank
credit line. The agreement matures in May 1996 and includes annual renewals
after that time.
On August 28, 1995, Circon merged with Cabot Medical Corporation in a
stock-for-stock transaction. As a result of this merger, Circon is preparing
to refinance Cabot's $67 million convertible subordinated notes, assuming that
75% of the current note holders will vote to "put" their notes back to Circon.
The vote by note holders should be completed by the end of November 1995.
Accordingly, a new revolving bank credit line for $75.0 million has been
arranged.
This new credit line will replace the $15.0 million credit line discussed
above. The agreements for the $75.0 million credit line have been finalized
and funding for the note, if necessary, should occur in late November or early
December 1995.
As of September 30, 1995, the company had cash and marketable securities
totalling $23.8 million. The company believes that cash flow from operations,
existing cash and marketable securities and available cash from bank credit
facilities are adequate to fund the company's existing operations for the
foreseeable future. Non-cash charges for depreciation and amortization
aggregated $9.1 million for the nine months 1995 and $3.9 million was used to
purchase plant and equipment (net of retirements).
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 13, 1995
Date RICHARD A. AUHLL
President
Chief Executive Officer
November 13,1995
Date R. BRUCE THOMPSON
Executive Vice President
Chief Financial Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
The user should be aware that this document is not complete, and should refer to
the 10Q for a complete set of financial information.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-95
<PERIOD-END> SEP-30-95
<CASH> 3,902,000
<SECURITIES> 19,871,000
<RECEIVABLES> 29,568,000
<ALLOWANCES> (1,837,000)
<INVENTORY> 33,904,000
<CURRENT-ASSETS> 94,387,000
<PP&E> 81,958,000
<DEPRECIATION> (32,777,000)
<TOTAL-ASSETS> 181,642,000
<CURRENT-LIABILITIES> 22,089,000
<BONDS> 0
<COMMON> 91,005,000
0
0
<OTHER-SE> 222,000
<TOTAL-LIABILITY-AND-EQUITY> 181,642,000
<SALES> 121,867,000
<TOTAL-REVENUES> 121,867,000
<CGS> 59,599,000
<TOTAL-COSTS> 120,921,000
<OTHER-EXPENSE> 4,889,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,424,000
<INCOME-PRETAX> (7,367,000)
<INCOME-TAX> (959,000)
<INCOME-CONTINUING> (6,408,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,408,000)
<EPS-PRIMARY> (.49)
<EPS-DILUTED> (.49)
</TABLE>
