FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
Commission file number 0-12025
CIRCON CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware (State or Other Jurisdiction of Incorporation or
Organization) 95-3079904 (I.R.S. Employer Identification No.)
6500 Hollister Avenue
Santa Barbara, California 93117
(Address of Principal Executive Offices)
(805)685-5100
Registrant's telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock ($.01 par value)
(Title of class)
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 12 months;
and (2) has been subject to such filing requirements for the
past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by
nonaffiliates of the Registrant was approximately $96,791,616 at
March 13, 1995, when the closing sale price of such stock, as
reported in the NASDAQ National Market System, was $16.00.
The number of shares outstanding of the Registrant's Common
Stock, $.01 par value, as of March 13, 1995, was 7,970,703
shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement dated April 20, 1995 for Part III.
PART I
ITEM 1. BUSINESS
Circon designs, manufactures and markets medical endoscope and
electrosurgery systems for diagnosis and minimally invasive
surgery. The Company's systems are used for a growing number of
medical specialties, including urology, arthroscopy,
laparoscopy, gynecology, thoracoscopy and plastic surgery.
Circon also designs, assembles and markets miniature color video
systems used with endoscope systems.
Minimally Invasive Surgery
Minimally invasive surgery refers to surgical procedures which
can be accomplished without a major incision or other
traumatization to the patient, in some cases without general
anesthesia. Endoscopy is one of the most important minimally
invasive surgical techniques. In addition to decreasing patient
trauma and frequently avoiding general anesthesia, endoscopy can
substantially reduce or eliminate postoperative hospitalization.
The resulting cost savings and patient benefits have caused
government reimbursement programs, as well as private insurance
and prepaid health plans, to encourage the use of endoscopic
procedures over traditional open surgery.
Specialized endoscopes for various diagnostic and surgical
procedures include laparoscopes (used for abdominal cavity
surgery below the diaphragm), thoracoscopes (used for chest
surgery above the diaphragm), ureteroscopes (used for urinary
tract surgery), cystoscopes (used for surgery in the uro-genital
tract) and arthroscopes (used for knee and other joint surgery).
Endoscopic procedures are often televised using miniature video
camera systems connected to the endoscope. The procedures are
performed in hospitals, ambulatory surgical centers and
physicians' offices.
Medical Advantages
The practice of endoscopy has expanded in recent years because
it provides several medical advantages over traditional open
surgery. Endoscopy:
o results in less trauma to muscle and surrounding tissue, and
minimal blood loss;
o requires only a sedative or local anesthesia in some cases,
rather than general anesthesia;
o reduces postoperative patient discomfort, immobilization,
hospitalization, recovery time and therapy;
o lowers the risk of infection; and
o minimizes scarring.
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Cost Advantages
The medical advantages of endoscopy can produce important cost
savings, particularly because endoscopy can reduce or eliminate
postoperative hospitalization and, in procedures such as
arthroscopy, rehabilitative therapy costs. For example, the
removal of the gall bladder by conventional open surgery can
require a period of approximately one week of postoperative
hospitalization followed by four to six weeks for full
recuperation. By comparison, laparoscopic cholecystectomy
(removal of the gall bladder through a puncture in the navel
using an endoscope) can reduce to one night or completely
eliminate postoperative hospitalization. As a result, the cost
of this procedure may be substantially reduced. For these
reasons, government reimbursement programs, as well as private
insurers and prepaid health plans, have generally encouraged the
use of the endoscopy over traditional open surgery.
Medical Applications
The use of Circon's endoscope systems is increasing in a
growing number of medical specialties including urology,
arthroscopy, laparoscopy, gynecology, thoracoscopy,
gastroenterology and cardiology. In urology, the Company's
endoscope and video systems are used principally for diagnosis
and surgery in the urethra, prostate, bladder, ureter and
kidney. In arthroscopy, Circon's video systems are used to
televise surgery on the knee and other joints. In laparoscopy,
Circon's endoscope and video systems are being used to remove
the gall bladder as well as to perform other procedures in the
abdominal cavity. In gynecology, the Company's USA Resectoscope
System is used to treat fibroid tumors and other uterine
conditions, and for procedures that provide an alternative to
hysterectomies. In gastroenterology, the Company's endoscopic
electrosurgery probes are used to cauterize ulcers and to
perform biopsies and other diagnostic procedures. In
cardiology, Circon's mechanical endoscope subsystems are used
with ultrasound equipment to make high resolution images of the
heart from inside the body. In thoracoscopy, Circon's video
hydro thoracoscope and Kaiser thoracoscopy instrument are
inserted through small incisions between the ribs and are used
to perform biopsies and other thoracic surgeries.
Product Overview
The Company manufactures three categories of products which
comprise the optical-video chain:
o Rigid and Flexible Medical Endoscope Systems
o Medical Video Systems
o Electrosurgery Systems
The Optical-Video Chain
The optical-video chain combines a medical endoscope system
with a medical video system and consists of an endoscope, a
miniature color video camera, adapter optics, a high intensity
light source, a fiber optic light cable, one or more video
monitors and a video cassette recorder. This complete system
allows the surgeon to perform the procedure viewing a magnified
image of the subject organ or tissue on a video monitor, rather
than directly through the endoscope eyepiece. Some procedures,
such as arthroscopy or laparoscopic cholecystectomy, are
performed almost exclusively using the video system. This
technique, which has been made practical by the miniaturization
of the color video camera so that it can be easily attached to
an endoscope, provides the following benefits:
o reduces surgeon fatigue by alleviating eye and back strain
from prolonged viewing through the eyepiece of the endoscope;
o increases operating room coordination, staff efficiency and
motivation by allowing the entire operating room team to view
the medical procedure and follow its progress;
o allows more than one physician to participate in the
procedure;
o facilitates the teaching of medical students and practicing
surgeons by permitting live viewing and playback;
o provides documentation of surgery; and
o increases patient education by allowing patients to view
prior operations in order to understand the nature of proposed
surgery.
Circon offers customers all the separate components
constituting the optical-video chain. The Company believes that
many customers prefer to purchase a complete system from a
single source to simplify the purchasing decision and to allow
the customer to look to a single company for servicing
responsibility. Selling a complete system enables Circon to
control quality at each link in the optical-video chain and not
be dependent for system performance on components outside its
control. Additional advantages of a broad product line include
greater efficiency in distribution and more flexibility in
competitive pricing.
Medical Endoscope Systems
The Company manufactures a broad line of rigid and flexible
endoscope systems and accessories. Rigid endoscopes transmit
the optical image through a linear series of high resolution
lenses encased in a stainless steel tube. Flexible endoscopes
transmit the optical image through a coherent bundle of several
thousand parallel optical fibers in a pliable tube. Both rigid
and flexible endoscopes use fiber optics to illuminate the
subject organ.
Rigid endoscopes provide higher image quality than flexible
endoscopes and, because they are less expensive to manufacture,
most rigid endoscopes sell for significantly lower prices than
flexible endoscopes. In addition, rigid endoscopes are more
durable and more easily manipulated by the physician than
flexible endoscopes. Flexible endoscopes have the advantage of
greater patient comfort and can access certain areas of the body
inaccessible by rigid endoscopes.
The critical features that doctors require in an endoscope are
high image quality (resolution, contrast, depth of focus, field
of view and color fidelity), sufficient light intensity, evenly
distributed illumination and ease of use. Doctors also require
responsive service by the manufacturer. Circon believes that
its products and service meet the highest standards in the
industry.
Medical Video Systems
Circon designs, assembles and markets miniature color video
systems for medical applications in endoscopy. The camera, a
high intensity light source and adapter optics, which are
produced by Circon, typically account for 50% to 95% of the
complete video system's retail price. Circon purchases and
modifies video monitors and video cassette recorders for resale
as part of these color video systems. Color video systems range
in price from approximately $10,000 to $30,000.
The most important features of video cameras for medical
applications are minimum size and weight, simplicity of
operation, reliability, light sensitivity, image quality and
immersibility. Circon believes that its cameras meet or exceed
the quality of competitive cameras in each of these
specifications. Circon's principal camera model weighs less
than two ounces and measures approximately one inch cubed. All
of Circon's cameras use solid state sensors and are waterproof,
which permits them to be immersed in disinfecting solution
together with other surgical instruments. Circon manufactures
camera models in both the NTSC (used in the United States and
Japan) and PAL (used in much of Europe) electronic formats so
that they are compatible with standard video monitors and video
cassette recorders worldwide. In late 1992, Circon introduced
the MicroDigital I medical video camera, the first single chip
CCD sensor camera with all digital signal processing of video
images. In late 1993, Circon introduced the easy to use
MicroDigital II camera. This camera provides the unmatched
digital video images in a simple to operate format. In early
1994, Circon began shipping the second generation Digital RGB
Video Camera, the MicroDigital IV and in mid 1994, the
MicroDigital III, a three chip camera, was introduced. The
MicroDigital family of cameras' enhanced color and resolution
greatly assists surgeons in properly diagnosing and performing
surgery by optimizing their view of all delicate structures and
procedural instrumentation making it the ideal camera for
minimally invasive surgical applications.
Electrosurgery Systems
Circon manufactures probes and generators for use in
electrosurgery. Circon's monopolar electrosurgery equipment is
used primarily in urological and gynecological resectoscope
systems. Monopolar equipment passes electrical current through
the body from the probe to an external grounding pad and is very
efficient for resection (cutting) and ablation (deep tissue
cauterization).
Circon also manufactures bipolar hemostasis equipment used to
control bleeding in the gastrointestinal tract. Unlike
monopolar equipment, the Company's BICAP system passes
electrical current only through a localized area around the
probe tip. The isolation of the electrical current to the area
of bleeding reduces collateral tissue damage. Circon
manufactures BICAP probes for treatment of esophageal tumors and
hemorrhoids, as well as other bi-polar instruments for cutting
and coagulating tissue in urological, gynecological and
pulmonary procedures.
Products for Specific Markets
Historically, most of Circon's endoscope products were designed
and sold for urological procedures while its video products were
designed for many fields of endoscopy, especially arthroscopy.
Since 1987, Circon has been introducing new specialized
endoscope systems for the potentially important emerging markets
of laparoscopy, gynecology and thoracic surgery.
Primary Markets
Urology. Circon believes that its products, marketed under the
CIRCON ACMI name, have the largest share of the urology
endoscope market in the United States and that more of its
products are in current use in that market than those of any
competitor. The Company believes that having the largest
installed base is an important advantage when introducing new
technology and products. The Company's urology products are
used for diagnosis and surgery throughout the urinary tract
including the urethra, prostate, bladder, ureter and kidney.
The demand for the urological instruments used to correct
medical problems of the prostate and bladder has increased as
the average age of the U.S. population has increased. In
addition, the Company believes that the introduction of lasers
and other new endoscopic products with features not found in
older urology products coupled with the growing familiarity of
urologists and the general public with these innovative
endoscopic techniques are additional factors contributing to the
growth of the urology market.
In 1988, Circon introduced the USA Series Resectoscope System,
a rigid cystoscope system. This system incorporates new
features and materials designed specifically for transurethral
resection procedures used to treat enlarged prostate glands and
to remove bladder tumors and strictures in the urinary system.
The distinct features of the Circon system include a
teflon-coated sheath design that reduces trauma to the patient's
urethra and snap-in/snap-out locking components which simplify
the assembly and disassembly of the system in the clinical
setting. The ergonomic design of the USA Series Resectoscope
also reduces physician fatigue during the approximately
hour-long procedure. All components are solid stainless steel
for improved durability rather than traditional chrome-plated
brass. In early 1993, Circon introduced a continuous flow laser
cystoscope system which expands the USA Series product line and
allows lasers to be utilized along with the other USA Series
products. In late 1993, Circon introduced the new USA Elite
System of resectoscopes and accessories. This system combines
the outstanding features of the USA System with the longest
resectoscope currently available. The price of a basic USA
Series Resectoscope System, including accessories, is
approximately $14,000.
Circon also manufactures and markets the new ACN-1 flexible
cystoscope. Its primary advantages over the rigid cystoscope
are patient comfort and its 180 deflection capability, which
allows the physician to examine the entire bladder including
areas not visible using a rigid cystoscope. The flexible
cystoscope is priced at approximately $7,200, while the price of
a rigid cystoscope is about $3,400.
Circon's AUR-8 flexible ureteroscope, introduced in 1989, is
part of a family of instruments which allow the urologist access
to the entire urinary system. It is one of the first endoscopes
providing access to the kidney via the body orifice with reduced
trauma to the patient because of its relatively small diameter.
The AUR-8 ureteroscope's working channel is designed
specifically for the insertion of Circon's electrohydraulic
lithotripsy probe or a laser fiber into the ureter and kidney.
This product substantially reduces the need to perform kidney
surgery through an incision in the patient's back. The price of
this product is approximately $11,500.
In December 1990, Circon began delivery of the MR-6
semi-flexible ureteroscope, the first of the MR Series products.
In 1993, Circon added the MR-9 semi-rigid ureteroscope with 5.4
and 2.1 French working channels for operating convenience, and
the MR-PC, the smallest 2 channel pediatric cystoscope
available. These products utilize flexible fiber optic imaging
inside a long thin tube which resembles a large-diameter
hypodermic needle. Circon's MR Series ureteroscopes have a dual
channel feature. This allows the physician to utilize the
endoscope as both a source of irrigation and as a means of
access for surgical tools. It allows the surgeon to operate on
the lower one-third of the ureter, which is where most kidney
stone problems occur. The MR Series is easier to use than the
more sophisticated flexible ureteroscopes. The Company sells
these products for approximately $7,000.
Some of the most significant developments in urology in recent
years have been in endourology, which has developed as an
alternative to traditional open surgery for removal of kidney
and ureter stones. Ureteroscopes and ESWL (extracorporeal
shockwave lithotripsy) equipment are utilized, either separately
or in conjunction with each other, to break up stones in the
kidney and ureter. However, ESWL equipment is significantly
more expensive than the Company's ureteroscopes and is not
effective in certain circumstances, particularly when the stone
is in the ureter rather than the kidney. Ureteroscopes, when
used in conjunction with ESWL treatments, expedite the removal
of stones from the kidney and ureter. The ureteroscope is used
to further reduce the size of the stone fragments following the
ESWL treatment and then to remove those stone fragments that are
too large to pass comfortably through the urinary tract.
Alternately, the ureteroscope may be used to perform the entire
task if ESWL is not affordable or otherwise available.
Arthroscopy. Arthroscopy is joint surgery utilizing an
endoscope called an arthroscope. This technique has
revolutionized knee surgery. Small scissors and other
instruments are used to perform the arthroscopy through tiny
incisions while the surgeon views the inside of the joint on the
video monitor. Arthroscopy is usually performed in about one
hour on an outpatient basis. Circon's complete optical-video
arthroscopy system sells for approximately $16,000. Circon has
been providing video camera systems for arthroscopy since 1974.
Most of Circon's cameras sold for arthroscopic applications are
used in arthroscope systems of other manufacturers. Circon
arthroscopes have an insignificant market share.
Gastroenterology. Circon's products for gastroenterology
include video systems and bipolar and monopolar electrosurgery
generators and probes. The Company's monopolar electrosurgery
equipment is used with gastroscopes to take biopsies and remove
polyps in the gastrointestinal tract. Circon's BICAP bipolar
electrosurgery devices are used to control bleeding in both the
upper and lower gastrointestinal tract, to cauterize ulcers and
to treat hemorrhoids and esophageal tumors. The Company's BICAP
hemostatic probe is designed to be used through a gastroscope.
A complete BICAP electrosurgery system sells for approximately
$10,000.
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Cardiology. Circon provides flexible mechanical endoscopy
probes for use with ultrasonic transesophageal echocardiography
equipment ("TEE") sold by other companies. In TEE procedures,
the endoscopy probe containing an ultrasonic generator is
inserted through the mouth into the esophagus, where it is used
to generate images of the heart. This technology has gained
rapid acceptance in the medical community because it provides
better images of the heart function than conventional
techniques. No market share data are available for TEE
endoscopy probes.
Emerging Markets
Medical cost containment pressures and patient demands are
causing surgeons to seek minimally invasive endoscopic
procedures to replace traditional open surgery. Since 1990, new
endoscopic procedures are gaining rapid acceptance as a
replacement for some of the older, widely used surgical
procedures such as gall bladder removal and hysterectomies. No
reliable market share data are available for these emerging
endoscopy markets.
General Surgery. In late 1990, Circon introduced a complete
line of medical instrumentation specifically designed to allow
the general surgeon to remove the gall bladder endoscopically
using a new procedure called video laparoscopic cholecystectomy.
The surgeon performs the procedure through four small punctures
in the abdomen through which specially-designed surgical
instruments are inserted. These punctures eliminate the need
for a six to eight inch incision in the abdominal muscle which
is required in traditional open surgery. While a conventional
cholecystectomy generally requires a week of hospitalization and
four to six weeks for full recovery, the laparoscopic procedure
generally requires only one night of hospitalization and one
week for full recovery.
Gall bladder removal is one of a growing number of traditional
open surgical procedures which lend themselves to this minimally
invasive technique. Other procedures include appendectomies,
bowel resection, hernia repair and vagotomies. The laparoscopic
instrumentation currently used for these procedures is the same
as or similar to that used for gall bladder removal.
Equipment offered by Circon for use in laparoscopic procedures
include laparoscopes, video systems, insufflators for inflating
the abdominal cavity during surgery, electrosurgery systems and
an array of specialized surgical instruments such as grasping
forceps and dissecting scissors. In late 1993, Circon
introduced the Snap-In Snap-Out line of reposable laparoscopic
instruments, with multiple use disposable tips and reusable
handles. These instruments are easily disassembled for cleaning
and sterilizing, and the tips and handles can be interchanged to
suit surgeon preference. Since the tips can be replaced instead
of repaired when needed, the cost per use is lower. A complete
video laparoscopic instrumentation system for an operating room
sells for approximately $40,000.
During a laparoscopic surgical procedure, it is often necessary
to withdraw a conventional laparoscope frequently in order to
clean the lens. Circon's HydroLaparoscope addresses this
problem of keeping the lens clean. It has a push-button lens
cleaning design that provides clearer visualization of the
operative site. Circon introduced the HydroLaparoscope at the
October 1991 meeting of the American College of Surgeons.
Gynecology. Circon has begun to market a new uterine
resectoscope to gynecologists for endometrial ablation and
resection procedures. Endometrial ablation, the cauterization
of the lining of the uterus, is a new procedure offering an
alternative to a substantial number of hysterectomy patients.
Approximately 600,000 hysterectomies are performed annually in
the United States. Endometrial ablation is performed on an
outpatient basis, generally takes less than one hour to perform
and requires only a few days recovery time rather than several
weeks with a hysterectomy. Circon products used in endometrial
ablation include a specialized electrosurgical working element,
a uterine resectoscope, a miniature color video camera, a high
intensity light source and an insufflator. Circon's uterine
video resectoscope system sells for approximately $30,000.
Circon also manufactures and markets other specially designed
endoscopes and accessories used in diagnostic and other
gynecological procedures for both the hospital and the office
environment.
Thoracoscopy. In 1992, Circon began to see increasing
opportunity for using minimally invasive surgical techniques to
perform surgery in the thoracic cavity. Circon's video hydro
thoracoscope system with a push button lens cleaning design and
line of sight irrigation capability are particularly
advantageous in thoracic surgery due to the vascular structures
typically involved. Circon recently began distributing a unique
line of specialized manual instruments for thoracoscopy to
compliment the existing video thoracoscopy system.
Plastic Surgery. In September 1994, Circon entered into a strategic
alliance to provide endoscope and video systems as well as direct
sales for Wells Endoscopy, a leader in plastic surgery instrumentation.
New plastic surgery techniques have just been developed utilizing
endoscopic video systems which reduce trauma to the patient and
allow for faster recovery.
Non-Medical Markets
Circon manufactures and distributes borescopes, video systems,
specialty glass and other products for non-medical applications.
Sales for these applications were about 3% of total sales in
1992, 2% of total sales in 1993, and about 1% of total sales in
1994.
Circon pioneered the use of rigid and flexible endoscope-type
devices called borescopes for internal inspection of jet
aircraft engines and other hard-to-access industrial
applications. Borescope inspection of jet engines is an
alternative to expensive engine disassembly and replacement.
The Company has developed many specialized industrial
applications for color video camera technology. The Company's
color MicroVideo Microscope Systems are designed for inspection
and quality control of integrated circuits and printed circuit
boards. Circon also produces video systems which substitute for
human on-site inspections in inaccessible or hazardous
environments in which high performance characteristics are
necessary, such as nuclear reactors and utility power plant
combustion chambers. The Company has manufactured various color
video systems for Department of Defense agencies utilizing
miniature video cameras.
The Company also produces specialty glass for night vision
goggles used by the military, precision miniature hardware for
the electronics industry and a line of MicroTools for use under
microscopes in both industrial and biological research
applications.
<PAGE>
Sales and Marketing
Circon sells endoscope and video camera systems in the United
States through a national direct sales organization of 98
employees, including 82 direct sales personnel, 10 regional
managers, 2 district managers and 4 nurses in sales support.
Circon's German subsidiary, Circon GmbH, employs 14 people,
including a general manager, service personnel and support
staff, responsible for sales in 19 countries. In 1988, Circon
established a sales force in Germany that now includes four
direct sales personnel, which also supports a growing dealer
network. There are two dealer managers in Germany with
responsibility for Western Europe and the Middle East. In 40
other countries, Circon sells through local dealers. A sales
force of 4 people sells directly to customers in Canada in
addition to dealers in selected areas. Two sales managers based
in the United States are responsible for Latin America, Canada
and the Pacific Rim countries. International sales are
denominated in U.S. dollars, except sales made by Circon GmbH,
which are denominated in German marks. Circon bears a risk of
currency exchange loss from German sales, although no material
losses have been incurred in the past.
Since 1988, Circon has been providing flexible mechanical
endoscopy probes to OEM customers which are suppliers of
components to manufacturers of transesophageal echocardiography
equipment. Such sales are made directly by the Company rather
than through the sales force.
Circon sells its industrial products through independent sales
representatives supported by a sales manager. Miniature
hardware and MicroTools are sold through the mail directly to
end users and through catalog dealers.
Circon participated in approximately 325 exhibitions, surgical
workshops and conventions worldwide during 1994 at which the
Company demonstrated its endoscopes and video camera products.
The Company also advertised in medical journals and made product
announcements by direct mailings to approximately 23,000
endoscopists and 12,000 medical researchers on its own mailing
list.
The Company has established and maintained long-term
relationships with faculty members of leading medical schools as
well as with leading surgeons and endoscopists throughout the
world. The Company's management, product development and
marketing personnel periodically meet with these faculty members
and practitioners at hospitals and clinics, Company facilities,
teaching seminars and trade shows. Consultations on a more
intensive basis occur with regard to new or planned products
within a specialist's particular area of interest. These
relationships have provided information concerning surgeons' and
endoscopists' needs, as well as valuable marketing contacts and
goodwill. In addition, working with leading practitioners and
medical schools on new product development is a source of
product innovation. The majority of the Company's sales are to
repeat customers.
Circon typically ships products within 30 days of receipt of a
firm purchase order. Accordingly, the Company does not believe
that backlog is a reliable indicator of future sales for any
fiscal period.
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Research and Development
The medical endoscope and video system businesses have been
characterized by continuing engineering innovations. Circon
believes that its ability to apply technical innovations quickly
to products designed for specific medical applications has been
and will continue to be important to its success.
Expenditures for research and development were $7,022,000,
$8,003,000 and $7,893,000 in 1992, 1993 and 1994 respectively.
During 1992 and 1993, Circon concentrated its medical endoscope
product development efforts on the MR Series semi flexible
endoscope enhancements, upgrades to the USA Series resectoscope
product line including the continuous flow "Elite" cystoscope
system and product line extensions to the resectoscope products
for gynecology. In 1994, efforts were concentrated on expansion
of the endoscope product line for gynecology, particularly
office hysteroscopy, and a new Rotating Continuous Flow
Resectoscope system for use with the new VaporTrode electrode
for urology.
Video product development during 1992 and 1993 centered around
the digital medical video camera systems, including updating the
single chip CCD sensor technology, as well as improving the
digital signal processing of video images. Development efforts
were also directed toward a new 300 Watt Xenon light source. In
1994, the MicroDigital III was introduced.
Manufacturing and Service
Circon manufactures entire endoscope systems, using proprietary
technologies and exacting quality control. Lens assemblies are
manufactured from blocks of optical glass, some of which the
Company manufactures from raw silica. Glass fibers are drawn
using advanced "3G" or "glass on glass" processes. The Company
has developed, refined and automated the technology required for
grinding and polishing large quantities of lenses and prisms
having dimensions and radius of curvatures less than one
millimeter. These lenses and prisms are used in the
manufacturing of high performance small diameter flexible
endoscopes. A key component in lens manufacturing is the
application of appropriate coatings to the surfaces of each
lens, using state-of-the-art vapor deposition equipment.
The Company assembles video cameras from basic components and
fabricated parts, many of which are manufactured by independent
vendors to the Company's specifications. Circon follows
inspection, testing and electronic tuning procedures during the
receiving and assembly process in order to assure the quality of
completed products. Most of the purchased components and
assemblies are currently available from more than one supplier,
although some important parts, including certain sensors and
cables, are currently purchased from a single source. The
Company does not believe that the loss of any single source of
supply would have more than a temporary adverse effect on the
Company's operations.
The Company provides a two-year warranty on video camera
systems sold in the United States. Most camera repairs are
performed by the Company in Santa Barbara, California. Camera
repairs are usually made within 24 hours of receipt in Santa
Barbara. Substitute cameras are provided if a longer repair
period is required. A service facility has been established in
Munich, Germany, to service cameras of European customers. Up
to a one-year warranty is provided on endoscope products. All
endoscope repairs are performed in Stamford, Connecticut and
Norwalk, Ohio. For rigid endoscopes out of warranty, the
Company permits the customer to exchange a damaged instrument
for a repaired instrument for a fixed fee below the cost of a
new instrument, typically in less than 48 hours.
Patents and Trademarks
While the Company holds numerous patents covering certain
aspects of its endoscope, video and electrosurgical technology,
it believes that technical know-how and experience are far more
significant factors in the medical instrumentation market. The
Company has several trademarks, including "Circon", "ACMI" and
"BICAP."
Government Regulation and Reimbursement Programs
The medical devices manufactured and marketed by the Company
are subject to regulation by the FDA as well as state and
foreign regulatory agencies. Depending on the classification of
medical device, different levels of regulation apply, ranging
from extensive premarket testing and approval procedures for
Class III devices, such as implantable devices, to substantially
lower levels of regulation for Class I devices, such as video
cameras, and Class II devices, such as endoscopes. Currently,
all the Company's products are in Class I or II. Some of the
Company's new products require premarketing notification to the
FDA under an expedited procedure known as 510(K) that is
available only for products which are substantially equivalent
to a device which was on the market prior to May 28, 1976. If
the FDA rejects the Company's claim that there was such a
substantially equivalent product, FDA approval involves a
procedure requiring extensive clinical testing, additional cost
and substantial delay in the introduction of the product to
market.
FDA and state regulations also require adherence to certain
"good manufacturing practices" ("GMP") which mandate detailed
quality assurance and record-keeping procedures, and the Company
is subject to unscheduled periodic regulatory inspections. The
Company has on two occasions in 1992 and 1993 received FDA
"regulatory letters" notifying the Company of deficiencies and
warning of enforcement action if the deficiencies were not
corrected. The Company believes that the deficiencies, which
both related to inadequate documentation of compliance with GMP,
have been corrected and that it is in substantial compliance
with GMP regulations.
The system for Medicare reimbursement of hospital expenses is
based on the diagnosis of the patient. Under this Diagnostic
Related Groups ("DRG") system, a hospital is paid a fixed amount
for admitting a patient with a specific diagnosis according to a
schedule of fees, regardless of the hospital's actual costs of
treating the patient. Whether or not the DRG reimbursement is
sufficient to cover the hospital's costs in a particular case,
the ceiling on reimbursement may provide an incentive to reduce
such costs. To the extent that the DRG program, and similar
programs of private insurers, provide such an incentive, the
Company believes that they promote the use of minimally invasive
diagnostic and surgical procedures such as endoscopy which
reduce postoperative hospitalization costs. The Company is
unable to predict whether future changes to reimbursement or
other healthcare reform efforts will materially affect sales of
the Company's products.
<PAGE>
Competition
Circon believes that its products have the largest share of the
urology endoscope market in the United States. Major
competitors in endoscopic markets include a Japanese company
(Olympus Optical Co. Ltd.) and two German companies (Karl Storz
GmbH and Richard Wolf GmbH). These companies, as well as
Stryker Corporation and Dyonics (an affiliate of Smith & Nephew
plc), are the principal competitors in the miniature medical
color video camera market.
The urology market is relatively mature and dominated by a
small number of competitors. The principal competitive factors
are product quality and reliability, product features,
innovation and service. The Company believes that it competes
favorably with respect to each of these factors.
The color video camera market is somewhat more fragmented than
the urology market, although some camera producers sell products
only for specific medical specialties. The principal
competitive factors are image quality, minimum size and weight,
simplicity of operation, reliability, light sensitivity and
immersibility. The Company believes that it competes favorably
with respect to each of these factors.
The emerging endoscope markets are highly fragmented and market
shares are indeterminate. The principal competitive factors are
product features, price and service. The Company believes that
it competes favorably with respect to each of these factors.
An additional competitive factor is breadth of product line.
Circon offers the complete product line for the urology,
laparoscopy and gynecology markets. Companies with broad
product lines have certain selling advantages. The Company
believes that many customers prefer to purchase a complete
video-endoscope system from a single source to simplify the
purchasing decision and to look to a single company for
servicing responsibility. Selling a complete system enables the
Company to control quality at each link in the optical-video
chain and not be dependent for system performance on components
outside its control. Additional advantages of a broader product
line are greater efficiency in distribution and more flexibility
in responding to competitors' price cuts offered on a single
component of the system.
The markets in which the Company's products compete are
characterized by continuing technical innovation and increasing
competition. There is no assurance that competition will not
further intensify, either from existing competitors or from new
entrants into the markets, or that some future medical
breakthrough or technological development will not confer a
competitive advantage on another company.
Some surgical procedures which utilize the Company's products
could potentially be replaced or reduced in importance by
alternative medical procedures or new drugs. The Company's USA
Series Resectoscope System is used to perform transurethral
resection of the prostate ("TURP") to treat benign prostatic
hyperplasia ("BPH"), a condition in older men where the enlarged
prostate gland restricts urination. One alternative procedure
using a balloon dilator to compress the prostate has been on the
market approximately five years and has reportedly shown some
efficacy, at least in delaying the need for TURP. Longer-term
effects of this balloon dilator procedure are still uncertain.
Other alternative procedures and certain drugs now undergoing
testing and evaluation may alleviate BPH or its symptoms or
delay the need for TURP. In 1992, Merck & Co., Inc. received
FDA approval for a new drug that, according to clinical testing
reported by the pharmaceutical company, caused the prostate
gland to stop growing in most cases, to shrink in some cases,
and to restore urine flow to near-normal rates in some cases.
Abbott Laboratories, Inc. and Pfizer, Inc. also have drugs which
are FDA approved for treatment of hypertension and for treatment
of BPH. High percentages of patients using these drugs are
reported to be showing some levels of symptomatic improvement.
Alternative procedures under evaluation include implantation of
a stent (metal coil) in the prostate to provide mechanical
relief from pressure on the urethra, and hyperthermia to shrink
the prostate using microwave probes inserted rectally or
urethrally. Another procedure under evaluation uses a laser
probe inserted in the urethra to treat the prostate. Circon is
the exclusive urology distributor of the UltraLine Lateral Beam
ND:YAG Laser Fiber for use in the urogenital tract. Circon also
began marketing as new type of electrode, the VaporTrode for
performing the TURP.
Circon is unable at this time to assess the efficacy, safety,
cost effectiveness, physician acceptance and potential
regulatory approval of these new drugs and alternative medical
procedures. To the extent that any of them significantly
reduces the need for TURPs, sales of the Company's resectoscope
products, which constitute a substantial portion of Circon's
current business, could be adversely affected. However, through
product acquisitions and strategic alliances, Circon may be able
to gain access to new technologies when they become applicable
to the urology market. The Company does not believe that these
medical alternatives will substantially reduce the need for
TURPs in the medium to long term. However, there may be short
term fluctuations in the number of procedures as new therapies
come on line. There is some evidence which indicates that the
number of TURPs performed could actually increase as more
alternatives become available. The Company does not believe
that its urology products used for diagnosis would be adversely
affected.
Employees
As of December 31, 1994, the Company had 762 full-time
employees, of whom 418 were engaged in manufacturing, 98 in
research and development, 181 in sales and marketing and 65 in
administration. Approximately 325 employees are covered by
collective bargaining agreements. The Company's collective
bargaining agreements covering union workers expire in March
1998 and January 1996. The Company has not experienced any
strikes or other work stoppages in recent years.
<PAGE>
Executive Officers of the Registrant
<TABLE>
<CAPTION>
FIRST YEAR
ELECTED
NAME POSITION WITH COMPANY AGE OFFICE
<S> <C> <C>
Richard A. Auhll President and Chief 53 1969
Executive Officer
Winton L. Berci Vice President 39 1989
Marketing and Sales
Frank D. D'Amelio Vice President, Chief 36 1989
Manufacturing Officer
Video Division
Daniel J. Meaney, Jr. Vice President, Secretary 58 1988
and General Counsel
R. Bruce Thompson Executive Vice President 51 1982
Chief Financial Officer
David P. Zielinski Vice President, 52 1994
General Manager
ACMI Division
</TABLE>
Richard Auhll has been the Chairman of the Board of Directors,
President and Chief Executive Officer of the Company since 1969.
Mr. Auhll has a Bachelor of Science degree in Engineering from
the University of Michigan, a Master of Science degree in
Engineering from Stanford University, and a Master of Business
Administration degree from Harvard University. Prior to 1969,
Mr. Auhll held positions with United Technologies Corporation
and was a management consultant. He is past Chairman of the
Board of Directors of Seton School for Developmentally Disabled
Children. Mr. Auhll is a member of the Board of Trustees of
the University of California at Santa Barbara Foundation.
Winton Berci joined the Company as Vice President, Marketing
and Sales in 1989. Prior to joining Circon, he worked for
fourteen years with Karl Storz Endoscopy America, Inc., a major
Circon competitor. He held various positions with Karl Storz
including Director of Marketing for six years. Mr. Berci has a
Bachelor of Science degree in Mechanical Engineering from
California State University.
Frank D'Amelio was appointed Vice President, Chief
Manufacturing Officer in 1994, prior to which he was Vice
President, General Manager of the Video Division since 1993, and
Vice President, CIRCON ACMI Engineering and Quality Control,
beginning in 1989. Prior to 1989, Mr. D'Amelio held various
positions with the Company including Director of Quality
Assurance. He joined ACMI in 1982. Mr. D'Amelio has a
Bachelor's Degree in Electrical Engineering from the University
of Hartford.
<PAGE>
Daniel Meaney joined Circon as Vice President, Secretary and
General Counsel in 1988. Mr. Meaney is a registered patent
attorney, and prior to joining the Company, he engaged in the
practice of law for 24 years, including private practice as
outside patent counsel for Circon and a former Secretary and
General Counsel for Applied Magnetics Corporation. Mr. Meaney
has a Bachelor of Electrical Engineering degree from the
Institute of Technology, University of Minnesota, and a Juris
Doctorate from William Mitchell College of Law, St. Paul,
Minnesota.
Bruce Thompson has been Executive Vice President and Chief
Financial Officer since 1985, and Vice President since 1982. He
joined the Company in 1977 as Controller. Prior to 1977, Mr.
Thompson held positions with Heyer-Schulte Corporation, a
subsidiary of American Hospital Supply Corporation and Cutter
Laboratories, Inc. Mr. Thompson has a Bachelor of Arts degree
in Economics from Stanford University, and a Master of Business
Administration degree from the University of California at Los
Angeles.
David Zielinski was appointed Vice President, General Manager of
Circon ACMI in 1994, prior to which he was Vice President of
Manufacturing for Circon ACMI. Prior to 1986, Mr. Zielinski
held various positions with the Company including Director of
Manufacturing for ACMI. He joined ACMI in 1982. Prior to
joining ACMI, Mr. Zielinski held various positions with General
Electric. Mr. Zielinski has a Bachelor of Science degree in
Electrical Engineering from University of Evansville and a
Master of Arts degree in Business Administration from Union
College.
ITEM 2. PROPERTIES
Circon currently owns or leases a total of 230,000 square feet
of office and manufacturing space in four locations.
The Company owns 29 acres of land and 52,000 square feet of
manufacturing space in Norwalk, Ohio. Plans to construct an
additional 27,000 square feet of manufacturing and office space
on the Ohio property are currently on hold.
The Company leases and occupies 98,000 square feet of office
and manufacturing space in a 150,000 square foot building in
Stamford, Connecticut through March, 2004. The Company has a
ten year lease with an option to extend for an additional five
years covering the entire 150,000 square foot facility.
Negotiations are currently underway to sublease 52,000 square
feet of this facility to another tenant.
In 1993, the Company purchased land and began construction of a
new 76,000 square foot facility in Santa Barbara. The purchase
of the project concluded an eleven year effort to obtain a new
building in the Santa Barbara area. The building was occupied
in January 1995, concurrently with the lease expiration on the
building that was previously occupied by the corporate
headquarters.
The Company leases and occupies approximately 4,000 square feet
of office and repair space in Munich, Germany through November,
1996.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings involving the Company
pending at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Circon's Common Stock is traded in the over-the-counter market
and is quoted through the National Association of Securities
Dealers Automated Quotation System under the NASDAQ symbol
"CCON." The following table shows the actual closing prices of
the Company's Common Stock quoted on the NASDAQ National Market
System.
<TABLE>
<CAPTION> High Low
1993:
<S> <C> <C>
First Quarter 22-1/2 15
Second Quarter 18-1/4 10-1/2
Third Quarter 14-1/4 10-1/4
Fourth Quarter 14-3/4 11
1994:
First Quarter 14-1/4 11-1/2
Second Quarter 13-3/8 9
Third Quarter 13-1/4 8-1/2
Fourth Quarter 13-3/8 10-3/4
<FN>
As of December 31, 1994, the Company had approximately 1,000
shareholders of record. No dividends have been paid by Circon
and it is not anticipated that any will be paid in the
foreseeable future.
</TABLE>
ITEM 6.
SUMMARY FINANCIAL INFORMATION
(in thousands, except per share data)
Circon Corporation and Subsidiaries
<TABLE>
<CAPTION>
December 31,
1990 1991 1992 1993 1994
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net Sales $54,706 $68,926 $83,483 $87,301 $88,944
Gross Profit 27,234 36,478 45,961 43,771 46,301
Operating Income 2,667 5,674 8,540 2,449 5,618
Net Income 1,791 3,515 6,579 2,258 3,811
Net Income per Share 0.32 0.53 0.80 0.28 0.47
Fully Diluted Net Income
per Share 0.31 0.53 0.80 0.28 0.47
Weighted Average
Shares Outstanding 5,678 6,600 8,245 8,158 8,147
Fully Diluted Weighted
Average Shares Outstanding 5,861 6.681 8,245 8,158 8,147
December 31,
1990 1991 1992 1993 1994
Balance Sheet Data:
Working Capital $16,928 $47,130 $52,691 $49,847 $48,589
Total Assets 41,930 75,019 83,458 87,545 94,976
Total Debt 16,029 - - 617 428
Total Shareholders'
Equity 19,255 65,220 72,206 74,564 78,559
<FN>
No cash dividends have been paid during the periods presented.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
Sales
Sales for 1994 totalled $88.9 million, reflecting a 2% increase
in sales by the U.S. direct sales force, a 6% increase in
industrial and government sales, and a 2% decrease in
international sales. Sales of rigid urology endoscopes, laser
fibers, semi-flexible ureteroscopes and ultrasound units were
all factors in the sales gain. Industrial and government sales
constitute approximately 6% of the total sales and are not
expected to grow significantly for the next year.
Sales for 1993 increased 5% over 1992 to $87.3 million
reflecting an 11% increase by the U.S. direct sales force, a 3%
decrease in international sales, and a decrease of 33% in sales
to industrial and government customers. Sales of rigid urology
endoscopes, laser fibers, semi-flexible ureteroscopes, and video
systems and accessories were all contributors to the sales gain.
The company estimates that price increases accounted for about
1% of the total increase in 1994 and slightly more than one half
of the total increase in 1993.
Gross Profit
Gross profit for 1994 was $46.3 million, up 6% from $43.8
million in 1993. A $2.4 million product restructuring charge
was included in the 1993 results. Gross profit as a percentage
of sales was up 2.0 percentage points to 52.1%, due to slight
increases in discounting in response to competitive pressures
and changes in product mix, which partially offset the effect of
the restructuring charge in 1993.
The new cost control environment and rapid technological
changes present in the medical market, caused Circon to
undertake efforts in the fourth quarter of 1993 to refocus two
key product lines, surgical instruments and video systems, to
make them more competitive in the marketplace. A $2.4 million
product restructuring charge reduced 1993 gross profit to $43.8
million compared to $46.0 million in 1992.
In 1993, Circon acquired Lican Medical Instrument Company and
its unique instrument technology, and in October 1993 introduced
the innovative Snap-In Snap-Out line of semi-disposable surgical
instruments. These reusable instruments are easily disassembled
for cleaning and sterilizing, and the tips can be quickly and
economically replaced when necessary. The Snap-In Snap-Out
instruments have made traditional instruments much less
desirable to the market. Accordingly, the Company adjusted
values associated with its old style inventory as part of the
product restructuring.
<PAGE>
Research and Development Expense
Research and development expenses were carefully controlled
throughout 1994 and totalled $7.9 million, down slightly from
$8.0 million in 1993. Development efforts continued to expand
the product offerings to our primary markets of urology,
gynecology, laparoscopy and thoracoscopy. Circon's efforts
resulted in the introduction of over 45 new products in 1994
including the MicroDigital III 3-chip video camera.
Research and development expense increased 14% in 1993 over
1992 as a result of development of the MicroDigital II and
MicroDigital IV video cameras, Snap-In Snap-Out line of
semi-disposable surgical instruments and expansion of the
urology and gynecology product lines.
Since 1992, research and development expense has ranged from
8.4% to 9.2% of sales.
Selling, General and Administrative Expense
Efforts to control expenses resulted in selling, general and
administrative expenses dropping 1% in 1994 compared to 1993.
Promotional efforts associated with laser fibers begun in 1993
were continued. Intensive efforts were 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 expense increased 9% in
1993 over 1992 reflecting new training courses and other
promotional efforts associated with the new laser and hand
instrument product lines.
The $244,000 non recurring operating expense adjustment
associated with executive reorganization changes and personnel
reduction was taken in the fourth quarter 1993. All known
financial impacts have been recorded by these product
restructuring and non-recurring operating expense charges.
Income from Operations
Income from operations in 1994 was $5.6 million, up 129% over
1993. The improved operating performance was achieved through
reduced operating expenses coupled with a modest increase in
sales.
Income from operations for 1993 was $2.4 million, after the
$2.6 million of product restructuring and non-recurring expenses
in the fourth quarter, down 71% from 1992 operating income of
$8.5 million.
The expense control efforts initiated at the end of the second
quarter 1993 resulted in second half 1993 operating income
before non-recurring charges of $2.9 million, a 29% increase in
operating income over the $2.2 million of the first half 1993.
The cost control measures are also reflected in the 1994
figures as total operating expenses are down 1% when compared to
1993 (prior to non-recurring operating expense).
Interest and Other Income/Expense
Interest income and expense totalled $511,000 in 1994 compared
to $623,000 in 1993. Although interest income was relatively
flat year to year, realized and unrealized losses on securities
were $261,000 in 1994 compared to $122,000 in 1993. Interest
income in 1993 decreased by $259,000 when compared to 1992,
reflecting lower interest rates in 1993.
Other income (expense) has resulted primarily from additional
expense associated with franchise taxes. This expense doubled
between 1993 and 1994 as Circon began paying franchise taxes in
more states. In 1992, other income (expense) was a result of
foreign exchange gains and losses arising from sales denominated
in German currency.
Income Before Provisions for Income Taxes and Extraordinary
Items
Pretax income increased 95% in 1994 to $5.9 million from $3.0
million in 1993 reflecting more efficient operations combined
with the $2.6 million one time charge in 1993. Pretax income
was $3.0 million in 1993, down from $9.3 million in 1992 as a
result of lower operating performance and the $2.6 million one
time charges discussed above.
Income Taxes and Cumulative Effect of Accounting Change
Income taxes in 1994 totalled $2.1 million compared to $1.0
million in 1993. The increase in the effective tax rate from
31% to 35% resulted from higher tax rates, increased foreign
losses for which no tax benefit is currently available and less
tax exempt income. In 1992, Circon had an effective tax rate of
32%.
Circon adopted SFAS 109 in 1993 resulting in a one time
adjustment of $204,000 to net income. In 1992, Circon GmbH was
profitable, and the Company was able to utilize net operating
loss carryforwards generated by this subsidiary to reduce its
provision for German income taxes by $234,000 which is reflected
as an extraordinary item in the Statement of Operations.
Net Income
Net income for 1994 was $3.8 million, an increase of 69% when
compared to 1993. Net income for 1993 was $2.3 million, a
decrease of 66% when compared to 1992 net income of $6.6 million.
While 1994 sales were a record high, uncertainties surrounding
healthcare reform have had a negative impact. The two year
debate surrounding healthcare reform has caused the annual
growth rate of U.S. healthcare expenditures to fall to about
2.5%, the lowest in several decades. Since minimally invasive
surgical procedures cut the total cost of surgery plus
hospitalization by about 60%, cost containment pressures could
promote further utilization of Circon's endoscopic equipment.
<PAGE>
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 December 31, 1994 the Company had cash and marketable
securities totalling $20.8 million. Circon's cash and
marketable securities, generated from the second stock offering
in 1991, provides financial strength and flexibility to fund
future growth and product development both internally and
through potential acquisitions. The Company will use
approximately $10.5 million, of which $8.5 million had been
funded by December 31, 1994, to construct 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
$6.0 million over the three-year period 1992 through 1994, and
$21.7 million was used to purchase plant and equipment (net of
retirements). See Consolidated Statement 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.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
Report of Independent Public Accountants
Consolidated Financial Statements:
Balance Sheets - December 31, 1993 and 1994
Statements of Operations for the years ended December 31, 1992,
1993, and 1994.
Statements of Shareholders' Equity for the years ended December
31, 1992, 1993, and 1994.
Statements of Cash Flows for the years ended December 31, 1992,
1993, and 1994.
Notes to Consolidated Financial Statements
(All other schedules are omitted because they are not
applicable, not required or the information required to be set
forth therein is included in the financial statements or in the
notes thereto.)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Circon Corporation:
We have audited the accompanying consolidated balance sheets of
Circon Corporation (a Delaware corporation) and subsidiaries as
of December 31, 1994 and 1993, and the related consolidated
statements of operations, shareholders' equity and cash flows
for each of the three years in the period ended December 31,
1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Circon Corporation and subsidiaries as of December 31, 1994
and 1993, and the results of their operations and their cash
flows for each of the three years in the period ended December
31, 1994, in conformity with generally accepted accounting
principles.
As explained in Note 3 to the consolidated financial statements,
effective January 1, 1993, the Company changed its method of
accounting for income taxes.
ARTHUR ANDERSEN LLP
Stamford, Connecticut,
February 6, 1995
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND 1994
ASSETS
<CAPTION>
December 31, December 31,
1993 1994
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investment $ 495,000 $ 346,000
Marketable securities 21,810,000 20,410,000
Accounts receivable, net of allowance of
$555,000 in 1993, and $627,000 in 1994 14,803,000 17,607,000
Inventories 17,632,000 16,471,000
Prepaid expenses and other assets 1,792,000 1,930,000
Deferred tax asset - current 1,842,000 2,639,000
Total current assets 58,374,000 59,403,000
PROPERTY, PLANT, AND EQUIPMENT,
at cost, net of accumulated depreciation
and amortization 25,580,000 32,010,000
OTHER ASSETS:
Deferred tax asset - noncurrent - 739,000
Other, at cost, net of accumulated amortization 3,591,000 2,824,000
Total assets $ 87,545,000 $ 94,976,000
<FN>
The accompanying notes are an integral part of
these consolidated statements
</TABLE>
<TABLE>
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND 1994
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
December 31, December 31,
1993 1994
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable 2,822,000 3,649,000
Accrued liabilities 5,313,000 6,692,000
Customer deposits 392,000 473,000
Total current liabilities 8,527,000 10,814,000
NONCURRENT LIABILITIES
Deferred income taxes 3,827,000 5,276,000
Capital lease obligations and other 627,000 327,000
Total noncurrent liabilities 4,454,000 5,603,000
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 7,954,333 outstanding
in 1993 and 1994, respectively 58,799,000 59,445,000
Unrealized losses on marketable securitie (314,000)
Cumulative translation adjustment (193,000) (341,000)
Retained earnings 15,958,000 19,769,000
Total shareholders' equity 74,564,000 78,559,000
Total liabilities and shareholders'
equity $ 87,545,000 $ 94,976,000
<FN>
The accompanying notes are an integral part of
these consolidated statements.
</TABLE>
<TABLE>
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, 1994
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
NET SALES $ 83,483,000 $ 87,301,000 $88,944,000
Cost of sales 37,522,000 41,000,000 42,643,000
Restructuring charge - 2,356,000 -
GROSS PROFIT 45,961,000 43,771,000 46,301,000
OPERATING EXPENSES:
Research and development 7,022,000 8,003,000 7,893,000
Selling, general and administration 30,399,000 33,075,000 32,790,000
Nonrecurring operating expenses - 244,000 -
Total operating expenses 37,421,000 41,322,000 40,683,000
INCOME FROM OPERATIONS 8,540,000 2,449,000 5,618,000
Interest income, net 882,000 623,000 511,000
Other income (expense), net (90,000) (64,000) (266,000)
INCOME BEFORE POVISION FOR INCOME TAXES,
EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 9,332,000 3,008,000 5,863,000
Provision for income taxes 2,987,000 954,000 2,052,000
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 6,345,000 2,054,000 3,811,000
Extraordinary item - utilization of net
operating loss carryforward 234,000 - -
cumulative effect of accounting change - 204,000 -
NET INCOME $ 6,579,000 $ 2,258,000 $ 3,811,000
Earnings per Common Share and Common Equivalent Share:
Earnings Before Extraordinary item and Cumulative
Effect of Accounting Change $ 0.77 $ 0.25 $ 0.47
Extraordinary item, utilization of NOL 0.03 -
cumulative effect of accounting change - 0.03 -
Earnings Per Share $ 0.80 $ 0.28 $ 0.47
Weighted Average Number of Shares
Outstanding 8,245,000 8,158,000 8,147,000
<FN>
The accompanying notes are an integral part of
these consolidated statements.
</TABLE>
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
<TABLE>
<CAPTION>
Common Stock Cumulative Total
Shares Retained Translation Shareholders'
Outstanding Amount Earnings Adjustment Equity
<S> <C> <C> <C> <C> <C>
BALANCES, December 31, 1991 7,659,267 $57,738,000 $7,121,000 $361,000 $65,220,000
Tax benefit from exercise of
stock options - 459,000 - - 459,000
Stock options and warrants
exercised 69,871 229,000 - - 229,000
Cumulative translation
adjustment - - - (281,000) (281,000)
Net income - - 6,579,000 - 6,579,000
BALANCES, December 31, 1992 7,729,138 $58,426,000 $13,700,000 $ 80,000 $72,206,000
Tax benefit from exercise of
stock options - 218,000 - - 218,000
Stock options exercised 59,356 155,000 - - 155,000
Cumulative translation
adjustment - - - (273,000) (273,000)
Net income - - 2,258,000 - 2,258,000
BALANCES, December 31, 1993 7,788,494 $58,799,000 $15,958,000 $(193,000) $74,564,000
Tax benefit from exercise of
stock options - 692,000 - - 692,000
Stock options exercised 228,339 608,000 - - 608,000
Stock purchased (62,500) (654,000) - - (654,000)
Cumulative translation
adjustment - - - (148,000) (148,000)
Unrealized loss on marketable
securities - - - - (314,000)
Net income - - 3,811,000 - 3,811,000
BALANCES, December 31,
1994 7,954,333 $59,445,000 $19,769,000 (341,000) $78,559,000
</TABLE>
<TABLE>
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, 1994
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES 1992 1993 1994
<S> <C> <C> <C>
Net income 6,579,000 2,258,000 3,811,000
Adjustments to reconcile net
income to cash provided from (used in)
operating activities:
Extraordinary item, utilization of net
operating loss carryforward (234,000) - -
Cumulative effect of accounting change - (204,000) -
Depreciation and amortization 1,870,000 2,028,000 2,098,000
Deferred income taxes 1,524,000 (70,000) 287,000
Change in assets and liabilities:
Accounts receivable, net (1,128,000) 177,000 (2,804,000)
Inventories (4,514,000) 3,350,000 1,161,000
Prepaid expenses and other assets (1,050,000) (237,000) (138,000)
Other assets (16,000) (91,000) 187,000
Accounts payable (461,000) (692,000) 827,000
Accrued liabilities 210,000 511,000 1,379,000
Customer deposits 137,000 (45,000) 81,000
Other noncurrent liabilities (7,000) 446,000 (234,000)
Total adjustments (3,669,000) 5,173,000 2,844,000
Net cash provided from operating activities 2,910,000 7,431,000 6,655,000
</TABLE>
<TABLE>
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, 1994
<CAPTION>
CASH FLOWS FROM INVESTING ACTIVITIES 1992 1993 1994
<S> <C> <C> <C>
Investments in marketable securities (12,698,000) 1,638,000 1,086,000
Purchases of plant and equipment (5,080,000) (8,276,000) (8,323,000)
Retirements of plant and euipment - 173,000 -
Purchase of Lican Medical Products - (1,027,000) -
Cumulative translation adjustment (281,000) (273,000) (148,000)
Net cash used in investing activities (18,059,000) (7,765,000) (7,385,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued under stock option plans 229,000 155,000 608,000
Common stock repurchased (654,000)
Tax benefit from exercise of stock option 459,000 218,000 692,000
Equipment lease financing 284,000 (103,000) (65,000)
Net cash provided from financing activities 972,000 270,000 581,000
Net decrease in cash and cash investments (14,177,000) (64,000) (149,000)
Cash and cash investments, beginning
of period 14,736,000 559,000 495,000
Cash and cash investments, end of period $ 559,000 $ 495,000 $ 346,000
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 28,000 $ 49,000 $ 46,000
Cash paid for income taxes $ 911,000 $ 1,393,000 $ 578,000
<FN>
The accompanying notes are an integral part of
these consolidated statements.
</TABLE>
CIRCON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
(1) Summary of Significant Accounting Policies
a. Principles of consolidation
The 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.
b. Line of business
The Company designs, manufactures and markets medical
endoscope systems, miniature color video systems and
electrosurgery systems primarily for diagnosis and minimally
invasive surgery applications. The Company's products are used
in urology, laparoscopy, gynecology, arthroscopy and other
fields of endoscopy.
c. Sales recognition
The Company recognizes revenue from product sales upon
shipment of goods.
d. 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:
<TABLE>
<CAPTION>
1993 1994
<S> <C> <C>
Raw materials $ 4,402,000 $ 3,010,000
Work in process 9,472,000 8,325,000
Finished goods 3,758,000 5,136,000
$17,632,000 $16,471,000
=========== ===========
</TABLE>
e. Property, plant, equipment and other assets
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
1993 1994
<S> <C> <C>
Land $ 250,000 $ 250,000
Building 1,280,000 1,280,000
Leasehold improvements 1,157,000 1,197,000
Manufacturing equipment 8,928,000 9,953,000
Office and other equipment 4,187,000 4,692,000
Platinum used in manufacturing
equipment 1,497,000 1,465,000
Demonstration equipment 13,452,000 14,029,000
Santa Barbara Building
construction in progress 2,706,000 8,504,000
Other construction in progress 982,000 1,392,000
34,439,000 42,762,000
Less - Accumulated depreciation
and amortization 8,859,000 10,752,000
25,580,000 $32,010,000
=========== ==========
<FN>
Other assets, net of amortization, consist of the following:
</TABLE>
<TABLE>
<CAPTION>
1993 1994
<S> <C> <C>
Goodwill, net of accumulated
amortization of $506,000 in 1993
and $606,000 in 1994 $ 2,663,000 $ 2,145,000
Other 928,000 679,000
$ 3,591,000 $2,824,000
=========== ===========
</TABLE>
Depreciation of property, plant, equipment and amortization of
other assets are provided for using the straight-line method
over the following estimated useful lives:
Building 33 years
Manufacturing equipment 5-10 years
Office and other equipment 4-10 years
Leasehold improvements and
leasehold interest Lower of estimated useful life or
remaining term of lease
Goodwill 20-40 years
Other 5-17 years<PAGE>
The Company follows the policy of capitalizing
expenditures that materially increase the asset lives and of charging
ordinary maintenance and repairs to operations as incurred.
When properties are disposed of, the costs and accumulated
depreciation are removed from the accounts and any resulting
gain or loss is reflected in the consolidated statements of
operations.
Platinum used in manufacturing equipment is not depreciated
and is carried at cost, net of reserves. Demonstration
equipment, which is eventually refurbished and sold, is carried
at cost, net of reserves to cover the cost of refurbishment.
f. Foreign currency translation
The assets and liabilities of the Company, Circon GmbH and
Circon Canada, Inc. are translated into U.S. dollars at current
exchange rates. The related translation adjustments are
recorded in cumulative translation adjustment, a separate
component of shareholders' equity. Revenues and expenses are
translated at the average exchange rates in effect during the
period. A net foreign currency transaction loss of $13,000, a
$33,000 gain and a $25,000 loss are included in cost of sales in
the Consolidated Statements of Operations for the years ended
December 31, 1992, 1993 and 1994, respectively.
g. Research and development
Expenditures for research and development are charged to
operations as incurred.
h. Cash investments
At December 31, 1993 and 1994, the Company's cash investments
include investments in bank money market funds and other
short-term, highly liquid investments. The Company considers
all highly liquid investments with maturities of three months or
less at the time of purchase to be cash equivalents for purposes
of the Consolidated Statements of Cash Flows.
i. 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.
j. Reclassifications
Certain reclassifications have been made to prior years'
financial statements to conform with current year presentation.
(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, 1993 and 1994:
<TABLE>
1993 1994
<CAPTION>
<S> <C> <C>
Held-to-maturity:
Municipal obligations $17,527,000 $15,035,000
Mutual bond funds 1,000,000 -
U.S. government securities - 1,356,000
Other 203,000 896,000
Available-for-sale:
Preferred stock in utility
companies 3,080,000 3,123,000 (A)
$21,810,000 $20,410,000
=========== ===========
<FN>
(A) The initial cost of these securities was $3,595,000. The
unrealized losses, net of tax benefit, of $314,000 at December
31, 1994 have been reflected in shareholders' equity.
Income on the above marketable securities was $660,000 and
$844,000 in 1993 and 1994, respectively, and is included in
interest income (expense) in the accompanying consolidated
statements of operations.
</TABLE>
(3) Income Taxes
The components of the provision for income taxes applicable to
income for the three years ended December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Federal
Current $ 875,000 $ 829,000 $1,459,000
Deferred 1,524,000 (70,000) 129,000
$2,399,000 $ 759,000 $1,588,000
State
Current 588,000 183,000 263,000
Deferred - - 158,000
$ 588,000 $ 183,000 $ 421,000
Foreign
Current - 12,000 43,000
Provision for income taxes $2,987,000 $ 954,000 $2,052,000
========== ========== ==========
<FN>
The income before provision for income taxes and extraordinary
item includes foreign pretax income of $417,000 in 1992, pretax
losses of $61,000 and $437,000 in 1993 and 1994, respectively.
For income tax purposes, the Company deducts the difference
between market value and exercise price arising from the
exercise of non-qualified stock options and disqualifying
dispositions of stock acquired under the Company's qualified
plans. Any reductions in income taxes payable resulting from
these differences are credited to common stock. A benefit of
$459,000, $218,000 and $692,000 was credited to common stock
during 1992, 1993 and 1994, respectively.
</TABLE>
<TABLE>
A reconciliation of the provision for income taxes to the
Federal statutory rate is as follows:
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Federal statutory rate 34% 34% 34%
State tax, net of Federal income
tax benefit 5% 4% 5%
Goodwill - 1% 1%
Tax exempt income (3%) (8%) (6%)
Research and development credit (2%) (2%) (2%)
Loss of foreign subsidiary for
which no benefit is currently
available - 1% 3%
Other (2%) 1% -
32% 31% 35%
====== ===== =====
</TABLE>
<TABLE>
The components of the net deferred tax liability are as follows:
<CAPTION>
1993 1994
<S> <C> <C>
Inventory reserves $1,746,000 $2,135,000
Vacation accrual 344,000 351,000
Income tax credit carryforwards 404,000 1,395,000
Depreciation (3,939,000) (5,315,000)
Other 126,000 192,000
Net before valuation allowance ($1,319,000) ($1,242,000)
Valuation allowance (666,000) (656,000)
Net deferred tax liability ($1,985,000) (1,898,000)
============ ============
</TABLE>
Upon adoption of SFAS 109, the Company recorded a valuation
allowance of $374,000 relating to inventory reserves recorded as
a result of the acquisition of ACMI in 1986. In 1994, tax
benefits realized upon disposal of this inventory were recorded
as a reduction to goodwill in accordance with SFAS 109.
At December 31, 1993 and 1994, the Company recorded a deferred
tax asset of $404,000 and $1,395,000, respectively, consisting
of $112,000 and $986,000, respectively, of research and
development credits not previously utilized and $292,000 and
$409,000, respectively, of alternative minimum tax credit
carryforwards. Offsetting these assets in 1993 and 1994, the
Company has recorded a valuation allowance for the alternative
minimum tax carryforwards and in 1994, recorded a valuation
allowance of $247,000 representing 25% of the research and
development credits. Based on historical pre-tax earnings and
the Company's current tax planning strategies, the Company
believes the remaining research and development credits will be
realized.
In January 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes." The adjustment to the January 1, 1993 consolidated
balance sheet to adopt SFAS 109 resulted in a $204,000 reduction
of net deferred income taxes. This amount is reflected in 1993
net income as the cumulative effect of a change in accounting
principle. It primarily represents the impact of adjusting
deferred taxes to reflect the current rate at January 1, 1993 of
34% as opposed to the higher tax rates that were in effect when
the deferred taxes originated.
During 1992, the Company utilized its remaining operating loss
carryforward to offset federal taxable income. Also in 1992,
the Company recognized a tax benefit of $234,000 (classified as
an extraordinary item) from utilization of net operating loss
carryforwards of a foreign subsidiary. At December 31, 1994,
the Company's German subsidiary has remaining loss carryforwards
of approximately $1.8 million for tax and financial reporting
purposes. This amount has not been included above and a
valuation allowance has been provided at 100%.<PAGE>
(4) Notes Payable
In September 1994, the Company extended its $15 million
revolving bank credit line, with an interest rate of the bank's
prime rate, or 1.5 points over the offshore rate (7.625% at
December 31, 1994). The new agreement matures in May 1996 and
includes annual renewals after that time. The loan is secured
by substantially all of the assets of the Company. Terms of the
banking arrangement prohibit payment of dividends, and require
the achievement of certain profitability levels and financial
ratios. In addition, the credit agreement contains certain
subjective acceleration clauses related to the Company's
financial condition and results of operations. At December 31,
1994, no amounts were outstanding under this credit agreement.
(5) Accrued Liabilities
<TABLE>
Accrued liabilities consist of the following:
<CAPTION>
1993 1994
<S> <C> <C>
Payroll and payroll related $3,736,000 $4,352,000
Warranty 347,000 454,000
Product liability 136,000 164,000
Taxes - other than income 294,000 720,000
Other 800,000 1,002,000
$5,313,000 $6,692,000
========== ==========
</TABLE>
(6) Commitments and Contingencies
Leases
The Company leases two facilities, one in Connecticut and one
in Germany, under operating leases which expire in 2003 and
1995, respectively. These leases provide for additional rental
payments to cover property taxes, insurance and maintenance. In
addition, the Company leases certain office equipment and
vehicles. Rental expense for the years ended December 31, 1992,
1993 and 1994 was $971,000, $1,579,000, and $1,945,000
respectively.
<TABLE>
The minimum lease payments at December 31, 1994 are as follows:
<CAPTION>
<S> <C>
1995 $1,629,000
1996 1,573,000
1997 1,591,000
1998 1,571,000
1999 1,642,000
2000 and thereafter 5,884,000
Total minimum lease payments $13,890,000
==========
<FN>
Contingencies
In the course of conducting its business, the Company has
various claims asserted against it. Management believes the
outcome of these claims will not have a material adverse effect
on the Company's financial position or results of operations.
</TABLE>
(7) Retirement Plan
<TABLE>
The Company has a defined benefit retirement plan (the "Plan")
covering certain hourly union employees at one of the Company's
manufacturing facilities. The components of pension expense are
as follows:
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Service cost - benefits
earned during the year $ 33,056 $ 38,340 $ 56,484
Interest cost on projected
benefit obligation 50,419 55,237 68,624
Actual return on plan assets (14,806) (12,440) (20,673)
Deferred loss on net assets (17,764) (36,275) (22,242)
Unrecognized prior service cost 9,446 9,446 14,155
Amortization of net loss (gain)
from earlier periods 3,542 (3,312) 16,800
Amortization of net
obligation at transition 384 384 384
Net pension expense $ 64,277 $ 51,380 $ 113,532
========= ========== ==========
</TABLE>
<TABLE>
Annual contributions to the Plan are at least equal to the
minimum required by law. The benefit obligations and funded
status of the Plan are as follows:
<CAPTION>
1993 1994
<S> <C> <C>
Actuarial present value of
accumulated benefit obligation,
including vested benefits of
$882,934 in 1993 and $792,366
in 1994 $(901,553) $ (824,631)
========== ==========
Projected benefit obligation for
service rendered to date (944,914) (824,631)
Plan assets at market value,
primarily fixed income securities 507,471 577,466
Projected benefit obligation in
excess of plan assets (437,443) (247,165)
Unrecognized net loss 298,020 62,597
Unrecognized prior service cost 136,511 141,983
Adjustment required to recognize
minimum liability (395,013) (208,039)
Unrecognized net obligation at
January 1, 1989 being amortized
over 15 years 3,843 3,459
Pension liability $(394,082) $(247,165)
=========== ==========
<FN>
The discount rate assumed in determining the actuarial present
value of benefit obligations was 7% and 8.5% for 1993 and 1994,
respectively. The expected long term rate of return on assets
was 10% and 8% for 1993 and 1994, respectively. There were no
plan amendments during 1993 or 1994.
Certain other hourly manufacturing employees are covered by a
union-sponsored collectively-bargained, multi-employer pension
plan. Contributions to this plan are based on
collectively-bargained agreements and were approximately
$105,000, $60,000 and $74,000 in 1992, 1993 and 1994,
respectively.
</TABLE>
(8) Stock Option Plans
The Company currently has one stock option plan under which
options covering 1,000,000 shares of common stock may be granted
to officers and employees, for a price not less than the fair
market value on the date of grant. The Company had two employee
stock option plans which expired in 1989 and 1993 under which
options to purchase 7,200 and 182,533 shares of common stock
were granted and are still outstanding. The exercise dates for
the options granted are determined by a Committee of the Board
of Directors at the time the options are granted. The maximum
option term is ten years. If the optionee ceases to be an
employee for any reason, any options granted which have not been
exercised will be canceled.
The Company also has a Directors Stock Option Plan, under which
options for up to 210,000 shares of common stock may be granted
to directors who are not officers of the Company, for a price
not less than 85% of the fair market value of the common stock
on the date of grant. The exercise dates for the options
granted are determined by a committee of inside directors at the
time the options are granted. The maximum option term is ten
years. If the optionee ceases to be a director for any reason,
any options granted which have not been exercised will be
canceled.
<TABLE>
The following table summarizes the activity in the Company's
stock option plans during the three years ended December 31,
1992, 1993 and 1994:
<CAPTION>
Option
Options Prices
<S> <C> <C> <C>
Balance, December 31, 1991 633,854 $ 3.00 - $25.75
Granted 104,328 16.00 - 32.50
Exercised 68,871 3.00 - 12.50
Terminated 64,673 3.50 - 32.50
Balance, December 31, 1992 604,638 $ 3.00 - $19.125
Granted 148,759 10.25 - 18.75
Exercised 59,356 3.00 - 5.50
Terminated 31,283 3.875 - 19.125
Balance, December 31, 1993 662,758 $ 3.00 - $19.125
Granted 591,746 8.50 - 11.50
Exercised 237,493 3.00 - 5.50
Terminated 96,978 4.75 - 18.75
Balance, December 31, 1994 920,033 $ 3.00 - $19.125
<FN>
At December 31, 1994, options to purchase 177,397 shares were exercisable
and options to purchase 389,000 shares were authorized but not granted.
</TABLE>
(9) Warrants
In 1989, the company issued to the company's president warrants (the "warrants")
to purchase up to 2.5 million of common stock at $4.33 per share (or less under
certain circumstances . The warrants were issued in consideration for the
president agreeing to restructure his commitment to provide working capital to
the Company and to convert, at the demand of the Company,
outstanding borrowings owed to him into common shares (at the
market price per share on the conversion date) to prevent
technical default under the Company's loan agreement (the "Stock
Purchase Commitment"). On May 7, 1990, the Company's president
agreed to return the Warrants. The Company terminated the Stock
Purchase Commitment and issued a warrant which allows the
president to purchase 100,000 shares of common stock at $4.61
per share. The warrants expire on January 1, 2000 or earlier
under certain circumstances.
The Company has a warrant plan for consultants. A total of
25,000 shares of common stock has been reserved under this plan
and warrants to purchase 3,000 shares have been granted at an
exercise price of $18.75 per share. In 1992, 1,000 warrants
were exercised at $18.75 per share.
(10) Acquisition
On March 20, 1993, the Company purchased the assets of Lican
Medical Products, Ltd. ("Lican") for 1,000,000 Canadian dollars
payable over a five year period. At December 31, 1994, $428,000
remains outstanding; $285,000 is payable in 1995 and is
included in current liabilities, and $143,000 is due after 1995
and is included in other noncurrent liabilities. Lican is a
designer and manufacturer of manual surgical instruments for
gynecology and laparoscopy. This acquisition has been accounted
for by the purchase method of accounting. The purchase price
has been allocated to the assets and liabilities of Lican based
on estimates of fair market values at the acquisition date. The
excess of purchase price over the estimated fair market value of
net assets acquired (goodwill) was approximately $750,000 which
will be amortized on a straight-line basis over twenty years.
The operating results of the acquisition are included in the
Company's consolidated statements of operations from the date of
acquisition. The sales and operating results of Lican prior to
acquisition were insignificant.
(11) Restructuring Charge
In the fourth quarter of 1993, Circon recorded a $2.6 million
restructuring charge consisting of $2.4 million product
restructuring inventory adjustments and $.2 million
non-recurring operating expense adjustments associated with
executive and reorganization changes and personnel reductions to
make the Company more competitive in the marketplace. All known
financial impacts have been recorded by these product
restructuring and non-recurring operating expense charges.
(12) Sales Segment Information
The Company sells products worldwide primarily from its
facilities in the United States. Net sales by geographic area
are as follows:
<TABLE>
1992 1993 1994
<CAPTION>
<S> <C> <C> <C>
Domestic sales $68,337,000 $72,719,000 $74,610,000
International sales 15,146,000 14,582,000 14,334,000
$83,483,000 $87,301,000 $88,944,000
=========== ========== ===========
</TABLE>
(13) Quarterly Financial Information (Unaudited)
<TABLE>
The following is a summary of unaudited selected quarterly
financial data for the years ended December 31, 1993 and 1994:
<CAPTION>
Quarter Ended
1994 March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
Net sales $20,833,000 $21,930,000 $22,469,000 $23,712,000
Gross profit 10,929,000 11,595,000 11,606,000 12,171,000
Operating income 1,133,000 1,152,000 1,637,000 1,696,000
Net income 789,000 889,000 1,122,000 1,011,000
Net income per share $ .10 $ .11 $ .14 $ .12
1993
Net sales $21,683,000 $20,929,000 $22,450,000 $22,239,000
Gross profit 11,915,000 11,283,000 11,644,000 8,929,000 (A)
Operating income 2,170,000 39,000 1,356,000 (1,116,000) (A)
Net income 1,685,000 152,000 985,000 (564,000) (A)
Net income per share $ .21 $ .02 $ .12 $ (.07) (A)
<FN>
(A) In the 4th quarter of 1993, Circon recorded a restructuring
charge relating to product restructuring inventory adjustments
and non-recurring operating expense adjustments (See Note 11).
</TABLE>
ITEM 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the section entitled "Election of
Directors" in the Registrant's definitive proxy statement to be
mailed to shareholders on or about April 20, 1995, and filed
with the Securities and Exchange Commission. Information on
executive officers is set forth in Part I.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the sections entitled "Executive
Compensation" and "Election of Directors" in the Registrant's
definitive proxy statements to be mailed to shareholders on or
about April 20, 1995 and filed with the Securities and Exchange
Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Reference is made to the sections entitled "Principal
Shareholders" and "Election of Directors" in the Registrant's
definitive proxy statements to be mailed to shareholders on or
about April 20, 1995, and filed with the Securities and Exchange
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the sections entitled "Election of
Directors" in the Registrant's definitive proxy statements to be
mailed to shareholders on or about April 20, 1995 and filed with
the Securities and Exchange Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
a. Financial Statements and Schedules Filed
1. Financial Statements - see Item 8 of this Report.
2. Supplemental Schedules - see Item 8 of this Report.
b. The Company filed no Reports on Form 8-K in the fourth
quarter of 1994 with the Securities and Exchange Commission.
c. Exhibit Index
3.1. Certificate of Incorporation of the Registrant,
(Incorporated by reference to Registrant's 1988 Form 10-K.)
3.1A. Certificates of Amendment of Certificate of
Incorporation of Circon Corporation were included as Exhibit
3.1A in Registrant's 1992 Form 10K and are incorporated herein.
3.2A. Amendment to Section 3.3 of Article III of Registrant's
Bylaws. This Amendment and a complete copy of the Bylaws of the
Registrant, as amended, was included as Exhibit 3.2A in the
Registrant's 1993 Form 10K and are incorporated herein.
4.5. Agreement between Registrant and Richard A. Auhll dated
May 7, 1990 terminating and canceling a previously issued
Warrant to Richard A. Auhll to purchase Common Stock of Circon
Corporation and granting in lieu thereof new Warrant to purchase
100,000 shares of Common Stock of Circon Corporation and the
Agreement was included as Exhibit 4.5 in Registrant's 1992 Form
10K and is incorporated herein.
9. Voting Trust Agreement *
10.10. Circon Corporation Credit Agreement covering a
$10,000,000 and Revolving Line of Credit and a $6,000,000 Term
Loan dated April 5, 1990 between Registrant and a Bank,
including a Subordination Agreement dated April 5, 1990 between
the Company, Richard A. Auhll and a Bank, and copies thereof
were included as Exhibit 10.10 in Registrant's 1990 Form 10-K
and is incorporated herein.
10.11. Build To Suit Lease dated June 22, 1992 between the
Company and CWO/TCEP II Joint Venture #II, a Texas Joint
Venture, and the Lease was included as Exhibit 10.11 in
Registrant's 1992 Form 10K and is incorporated herein.
<PAGE>
10.12. Circon Corporation Business Loan Agreement covering a
$15,000,000 Revolving Line of Credit between Registrant and a
Bank dated June 30, 1993. This Agreement was included as
Exhibit 10.12 in Registrant's 1993 Form 10K and is incorporated
herein.
10.13. Agreement for Purchase and Sale and Escrow Instructions
dated December 9, 1993 between the Company and CWO/TCEP II Joint
Venture #II, a Texas Joint Venture. This Agreement was included
as Exhibit 10.13 in Registrant's 1993 Form 10K and is
incorporated herein.
10.14. Termination of Build To Suit Lease dated December 13,
1993 between the Company and CWO/TCEP II Joint Venture #II, a
Texas Joint Venture. This Agreement was included as Exhibit
10.14 in Registrant's 1993 Form 10K and is incorporated herein.
10.15. Amendment No. 1 to Business Loan Agreement dated March
24, 1994 between Registrant and Bank covering certain amendments
to the Circon Corporation Business Loan Agreement dated June 30,
1993. This amendment is included as an Exhibit to the report
and is incorporated herein. Page .
10.16. Amendment No. 2 to Business Loan Agreement dated
September 1, 1994 between Registrant and Bank covering certain
amendments to the Circon Corporation Business Loan Agreement
dated June 30, 1993. This amendment is included as an Exhibit
to the report and is incorporated herein. Page .
11. Statement re computation of Per Share Earnings*
12. Statement re computation of Ratio*
13. Annual Report to Security Holders, Form 10-Q or Quarterly
Report to Shareholders*
18. Letter re Change in Accounting Principles*
19. Previously unfiled documents*
22. Subsidiary of the Registrant*
23. Published reports regarding matters submitted to a vote of
Security Holders*
24.1. Consent of Independent Public Accountants*
* Not applicable or contained elsewhere herein.
Supplemental Information
No Annual Report or Proxy Materials have been sent to
Shareholders with respect to 1994. Copies will be furnished to
the Commission when sent to Shareholders, but shall not be
deemed to be "filed."
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Registrant has caused this
Annual Report to be signed on its behalf by the undersigned,
thereupon duly authorized.
DATED:______________________
CIRCON CORPORATION
(Registrant)
By ___________________________________
Richard A. Auhll
President, Chief Executive Officer
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following
persons, which include the Chief Executive Officer, the Chief
Financial Officer, the Chief Accounting Officer and a majority
of the Board of Directors, on behalf of the Registrant and in
the capacities and on the dates indicated:
Signatures Title Date
President, Chief Executive
Officer and Chairman of the
Board (Principal Executive
___________________________ Officer) ________________
Richard A. Auhll
Executive Vice President and
Chief Financial Officer
(Principal Financial and
___________________________ Accounting Officer) ________________
R. Bruce Thompson
___________________________ Director ________________
Harold R. Frank
___________________________ Director ________________
Rudolf R. Schulte
___________________________ Director ________________
Paul W. Hartloff, Jr.
___________________________ Director ________________
John Blokker
