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 March 31, 1995 COMMISSION FILE NO. 0-12025
CIRCON CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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) (Zip Code)
Registrant's telephone number, including area code: (805) 968-5100
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 March 31, 1995:
7,970,703
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND MARCH 31, 1995
ASSETS
(Unaudited)
December 31, March 31,
1994 1995
CURRENT ASSETS:
Cash and temporary cash investment $ 346,000 $ 611,000
Marketable securities 20,410,000 20,715,000
Accounts receivable, net of allowance of
$627,000 in 1994, and $665,000 in 1995 17,607,000 16,935,000
Inventories 16,471,000 17,809,000
Prepaid expenses and other assets 1,930,000 1,919,000
Deferred tax asset - current 2,639,000 2,639,000
Total current assets 59,403,000 60,628,000
PROPERTY, PLANT, AND EQUIPMENT,
at cost, net of accumulated depreciation
and amortization 32,010,000 33,246,000
OTHER ASSETS:
Deferred tax asset - noncurrent 739,000 739,000
Other, at cost, net of accumulated
amortization 2,824,000 2,782,000
Total assets 94,976,000 $ 97,395,000
The accompanying notes are an integral part of
these consolidated statements.
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND MARCH 31, 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
December 31, March 31,
1994 1995
CURRENT LIABILITIES:
Accounts payable 3,649,000 3,940,000
Accrued liabilities 6,692,000 7,088,000
Customer deposits 473,000 486,000
Total current liabilities 10,814,000 11,514,000
NONCURRENT LIABILITIES
Deferred income taxes 5,276,000 5,354,000
Capital lease obligations and other 327,000 192,000
Total noncurrent liabilities 5,603,000 5,546,000
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;
7,954,333 and 7,970,703 outstanding
at December 31, 1994 and
March 31,1995 59,445,000 59,511,000
Unrealized losses on Marketable Securities (314,000) (166,000)
Cumulative translation adjustment (341,000) 107,000
Retained earnings 19,769,000 20,883,000
Total shareholders' equity 78,559,000 80,335,000
Total liabilities and shareholders'
equity $ 94,976,000 $ 97,395,000
The accompanying notes are an integral part of
these consolidated statements.
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION
Three Months Ended
March 31,
(Unaudited) (Unaudited)
1994 1995
NET SALES $ 20,833,000 $ 22,474,000
COST OF SALES 9,904,000 10,637,000
GROSS PROFIT 10,929,000 11,837,000
OPERATING EXPENSES:
Research and development 1,995,000 1,827,000
Selling, general and administrative 7,801,000 8,529,000
Total operating expenses 9,796,000 10,356,000
INCOME FROM OPERATIONS 1,133,000 1,481,000
Interest income, net 84,000 329,000
Other income (expense), net (3,000) (166,000)
INCOME BEFORE PROVISION FOR INCOME
TAXES 1,214,000 1,644,000
Provision for income taxes 425,000 530,000
NET INCOME $ 789,000 $ 1,114,000
Net Earnings Per Share $ 0.10 $ 0.13
Weighted average number of shares
outstanding 8,144,667 8,433,662
The accompanying notes are an integral part of
these consolidated statements.
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES 1994 1995
Net income 789,000 1,114,000
Adjustments to reconcile net
income to cash provided from (used in)
operating activities:
Depreciation and amortization 532,000 394,000
Deferred income taxes - 78,000
Change in assets and liabilities:
Accounts receivable, net 568,000 672,000
Prepaid and other assets (129,000) 11,000
Other assets 45,000 14,000
Accounts payable 783,000 291,000
Accrued liabilities 378,000 396,000
Customer deposits 71,000 13,000
Other long term liabilities (213,000) (135,000)
Total adjustments 1,530,000 396,000
Net cash provided from operating
activities 2,319,000 1,510,000
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
(Unaudited) (Unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES 1994 1995
Investments in marketable securities (134,000) (157,000)
Purchases of plant and equipment (2,248,000) (1,602,000)
Cumulative translation adjustment (24,000) 448,000
Net cash used in investing activities (2,406,000) (1,311,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued under stock option plan 59,000 66,000
Net cash provided from financing activities 59,000 66,000
Net decrease in cash and cash investments (28,000) 265,000
Cash and cash investments, beginning
of period 495,000 346,000
Cash and cash investments, end of per $ 467,000 $ 611,000
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 16,000 $ 10,000
Cash paid for income taxes $ 53,000 $ 153,000
The accompanying notes are an integral part of
these consolidated statements.
CIRCON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
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, 1994.
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-i
are summarized as follows:
(Unaudited)
December 31, March 31,
1994 1995
Raw materials $ 3,010,000 $ 2,962,000
Work in process 8,325,000 8,432,000
Finished goods 5,136,000 6,415,000
$16,471,000 $17,809,000
=========== ===========<PAGE>
(2) Marketable Securities
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in
Debt and Equity Securities". SFAS 115 requires that debt and equity securities
be carried at fair value unless the Company has the positive intent and ability
to hold debt securities to maturity. Debt and equity securities must be
classified into one of three categories: held-to-maturity, available-for-sale
or trading securities. The net effect on the January 1, 1994 consolidated
balance sheet of adopting SFAS 115 was not material to the consolidated
financial statements.
The Company classifies their investments as held-to-maturity and
available-for-sale and does not hold any trading securities. Held-to-maturity
securities are recorded at cost. Adjustments to market value for available-for
- -sale maturities are recorded as a separate component in the shareholders'
equity section of the consolidated balance sheet.
The following summarizes the Company's marketable securities at December
31, 1994 and March 31, 1995:
Unaudited
March 31,
1994 1995
Held-to-maturity:
Municipal obligations $15,035,000 $15,342,000
U.S. government securities 1,356,000 1,362,000
Other 896,000 913,000
Available-for-sale:
Preferred stock in utility
companies 3,123,000 3,098,000 (A)
$20,410,000 $20,715,000
=========== ===========
(A) The initial cost of these securities was $3,595,000. The unrealized
losses, net of tax benefit, of $166,000 at March 31, 1995 have been reflected in
shareholders' equity.
Income on the above marketable securities was $257,000 and $330,000 in 1994
and 1995, respectively, and is included in interest income (expense) in the
accompanying consolidated statements of operations.<PAGE>
(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 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) Subsequent Event
On April 25, 1995, Circon Corporation and Cabot Medical Corporation
announced the signing of a definitive agreement to merge in a stock-for-stock
transaction.
Under the terms of agreement by the boards of both companies, Cabot
shareholders would receive 0.415 shares of Circon common stok in exchange
for each Cabot share held. This will result in approximately 4.7 million
new shares of Circon common stock being issued to Cabot shareholders.
The merger is subject to various conditions including the approval of
shareholders of both companies and the receipt by Circon of financing of
approximately $50 million to cover the potential early retirement of Cabot's
convertible subordinated notes. The merger is expected to close during the
third calendar quarter of 1995.
ITEM 2. Management's Discussion and Analysis of Operations and Financial
Condition
RESULTS OF OPERATIONS
Three Months Ended March 31, 1995
Compared to Three Months Ended March 31, 1994
Sales
Total sales of $22.5 million were the highest sales of any Circon first
quarter. The $1.6 million or 8% sales increase over the first quarter 1994
resulted from growth in both the domestic and international sector.
Sales by the U.S. direct sales force were 16.7 million, up 6% from the
first quarter 1994 due to improving trends in the U.S. healthcare market.
International sales increased 25% to $4.2 million when compared to the first
quarter 1994 due to improved European dealer sales. Industrial and OEM
sales were $1.5 million compared to $1.7 million in 1994 and are not expected
to grow.
Price increases were negligible between the two quarters, therefore the
majority of the 8% sales increase related to volume.
Gross Profit
Gross profit was $11.8 million for the first three months of 1995
compared to $10.9 million in the same 1994 period. As a percent of sales
gross profit was 52.7%, up slightly over the 52.5% of the first quarter 1994,
and up solidly over the last two quarters of 1994 due to more efficient
manufacturing and favorable sales mix.
Operating Expenses
Total operating expenses of $10.4 million for the first quarter 1995 were
up 5.7% from $9.8 million in the same 1994 period. As a percentage of sales,
total operating expenses were 46% of sales, down from 47% last year.
R&D expenditures totalled $1.8 million or 8% of sales. This was down
slightly from $2.0 million or 10% of sales for the first quarter 1994. R&D
expenses are expected to be maintained at their current level, but as a percent
of sales are now expected to decline.
Selling, general and administrative expenses of $8.5 million for the
first quarter 1995 increased 9% compared to $7.9 million for 1994.
Promotional efforts associated with the launch of Circon's new VaporTrode
electrode and Continuous Flow Rotating Resectoscope system occurred in the
first quarter 1995.<PAGE>
Income from Operations
First quarter 1995 operating income of $1.5 million was up from $1.1
million in the first quarter 1994 reflecting the improvement in gross profit
and lower R&D expenditures.
Interest Income, Other Expenses
Interest income and other expense totalled $163,000 in the first quarter
1995 compared to $81,000 in the same 1994 period. Interest income of $329,000
increased from $84,000 in the prior year, due to higher interest rates, and was
partially offset by realized losses on marketable securities of $58,000 as
compared to a $82,000 loss in 1994. Other income and expense included $61,000
net foreign exchange loss, $15,000 franchise taxes and 26,000 other expense
compared to $2,000 net foreign exchange gain in the first quarter 1994.
Income Taxes
Income taxes in the first quarter 1995 were $530,000 compared to $425,000
in the first quarter of 1994. The decrease in the effective tax rate from 35%
to 32% resulted from increased foreign sales which allow for reduced taxes due
to Circon's foreign sales corporation.
Net Income
First quarter 1995 net income totalled $1.1 million compared to $0.8
million in the first quarter 1994. Earnings per share was $0.13 compared to
$0.10 in 1994.
LIQUIDITY AND CAPITAL RESOURCES
In September 1994, the Company extended its $15.0 million revolving bank
credit line. The new agreement matures in May 1996 and includes annual
renewals after that time.
As of March 31, 1995 the Company had cash and marketable securities
totalling $21.3 million. Circon's cash and marketable securities provides
financial strength and flexibility to fund future growth and product development
both internally and through potential acquisitions. The Company will require
$0.6 million cash in addition to funding $9.9 million prior to March 31, 1995,
for a new facility in Santa Barbara, California. The building was occupied in
January 1995 coterminous with the lease expiring on the building previously
occupied by the corporate headquarters.
Non-cash charges for depreciation and amortization aggregated $394,000
for the first quarter 1995, and $1.6 million was used to purchase plant and
equipment (net of retirements). See Consolidated Statements of Cash Flows and
related notes thereto.
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.
On April 24, 1995 Circon entered into an agreement to merge with Cabot
Medical Corporation in a stock for stock transaction to be accounted for as a
pooling of interests. See Note (4) Subsequent Event. As a result of this
merger, Circon must be prepared to cover the potential retirement of Cabot's
$67 million convertible subordinated notes. Accordingly, Circon is arranging
for approximately $75 million of bank financing to be available should the
convertible note be tendered after the merger.
ITEM 5. Other Information
On April 24, 1995, Circon Corporation entered into an agreement with
Cabot Medical Corporation whereby Circon and Cabot would merge in a stock-for-
stock transaction to be accounted for as a pooling of interests. Under the
terms of the agreement, Cabot shareholders would receine 0.415 shares of
Circon common stock in exchange for each share of Cabot stock. This exchange
ratio will result in approximately 4.7 million shares of Circon stock being
issued to Cabot shareholders. The closing of the merger is subject to various
conditions including but not limited to the approval by the shareholders of
both companies, receipt by Circon of a financing commitment of approximately
$50 million to cover the potential early retirement of Cabot's convertible
notes, and receipt of fairness opinions and opinions regarding the ability to
account for the transaction as a pooling of interests. The merger is expected
to close during the third quater of 1995.
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
05/12/95
Date RICHARD A. AUHLL
President
Chief Executive Officer
05/12/95
Date R. BRUCE THOMPSON
Executive Vice President
Chief Financial OfficerFORM 10-Q
