FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR QUARTER ENDED June 30, 1995 COMMISSION FILE NO. 0-12025
CIRCON CORPORATION
(Exact Name of Registrant as Specified in Its Charte
Delaware 95-3079904
(State or other jurisdiction of
incorporation or organization) Identification No.)
6500 Hollister Avenue, Santa Barbara, California 93117-3019
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (805) 685-5100
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Number of Common Shares Outstanding at June 30, 1995: 7,975,968
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND JUNE 30, 1995
ASSETS
(Unaudited)
December 31 June 30,
1994 1995
---------- ----------
CURRENT ASSETS:
Cash and temporary cash investment $346,000 $99,000
Marketable securities 20,410,000 19,781,000
Accounts receivable, net of allowance
of $627,000 in 1994, and $663,000 in 1995 17,607,000 18,933,000
Inventories 16,471,000 19,526,000
Prepaid expenses and other asset 1,930,000 2,124,000
Deferred tax asset - current 2,639,000 2,639,000
---------- ----------
Total current assets 59,403,000 63,102,000
PROPERTY, PLANT, AND EQUIPMENT,
at cost, net of accumulated depreciation
and amortization 32,010,000 32,872,000
OTHER ASSETS:
Other, at cost, net of accumulated
amortization 2,824,000 2,752,000
---------- ----------
Total assets $ 94,237,000 $98,726,000
========== ===========
The accompanying notes are an integral part of
these consolidated statements.
2
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND JUNE 30, 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
December 31, June 30,
1994 1995
---------- ---------
CURRENT LIABILITIES:
Accounts payable $ 3,649,000 $ 4,279,000
Accrued liabilities 6,692,000 7,167,000
Customer deposits 473,000 502,000
---------- ----------
Total current liabilities 10,814,000 11,948,000
---------- ----------
NONCURRENT LIABILITIES
Deferred income taxes 4,537,000 4,671,000
Capital lease obligations and other 327,000 153,000
---------- ----------
Total noncurrent liabilities 4,864,000 4,824,000
---------- ----------
COMMITMENTS
SHAREHOLDERS' EQUITY
Preferred stock, $ .01 par value:
1,000,000 shares authorized, none
outstanding
Common stock; $ .01 par value:
50,000,000 shares authorized;
7,954,333 and 7,975,968 outstanding
at December 31, 1994 and June 30,
1995 8,000 8,000
Additional Paid in Capital 59,437,000 59,524,000
Unrealized losses on Marketable Securities (314,000) (64,000)
Cumulative translation adjustment (341,000) (229,000)
Retained earnings 19,769,000 22,715,000
---------- -----------
Total shareholders' equity 78,559,000 81,954,000
---------- -----------
Total liabilities and shareholders'
equity $94,237,000 $98,726,000
========== ============
The accompanying notes are an integral part of
these consolidated statements.
3
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Three Months Ended Six Months Ended
June 30 June 30,
<CAPTION>
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
1994 1995 1994 1995
----------- ----------- ----------- -----------
NET SALES $21,930,000 $25,936,000 $42,763,000 $48,410,000
COST OF SALES 10,335,000 11,889,000 20,239,000 22,526,000
----------- ----------- ---------- -----------
GROSS PROFIT 11,595,000 14,047,000 22,524,000 25,884,000
OPERATING EXPENSES:
Research and development 1,998,000 1,935,000 3,993,000 3,762,000
Selling, general and
administrative 8,445,000 9,574,000 16,246,000 18,103,000
---------- ----------- ---------- ----------
Total operating expenses 10,443,000 11,509,000 20,239,000 21,865,000
---------- ----------- ---------- ----------
INCOME FROM OPERATIONS 1,152,000 2,538,000 2,285,000 4,019,000
Interest income, net 167,000 250,000 251,000 519,000
Other income (expense), net (9,000) (74,000) (12,000) (180,000)
---------- ----------- ---------- -----------
INCOME BEFORE PROVISION FOR INCOME
TAXES 1,310,000 2,714,000 2,524,000 4,358,000
Provision for income taxes 421,000 882,000 846,000 1,412,000
---------- ----------- ---------- ----------
NET INCOME $889,000 $1,832,000 $1,678,000 $2,946,000
========= ========== ========== ==========
Net Earnings Per Share $0.11 $0.22 0.21 $0.35
Weighted average number of shares
outstanding 8,066,477 8,496,437 8,170,162 8,465,538
The accompanying notes are an integral part of
these consolidated statements.
4
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES 1994 1995
----------- -----------
Net income $ 1,678,000 $ 2,946,000
----------- -----------
Adjustments to reconcile net
income to cash provided from (used in)
operating activities:
Depreciation and amortization 1,081,000 917,000
Deferred income taxes - 134,000
Change in assets and liabilities:
Accounts receivable, net (331,000) (1,326,000)
Inventories (348,000) (3,055,000)
Prepaid and other assets (429,000) (194,000)
Other assets 55,000 17,000
Accounts payable 838,000 630,000
Accrued liabilities 139,000 475,000
Customer deposits 81,000 29,000
Other long term liabilities (255,000) (174,000)
---------- ------------
Total adjustments 831,000 (2,547,000)
---------- ------------
Net cash provided from operating activities 2,509,000 399,000
--------- ------------
5
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
(Unaudited) (Unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES 1994 1995
---------- -----------
Investments in marketable securi 1,516,000 879,000
Purchases of plant and equipment (3,998,000) (1,724,000)
Cumulative translation adjustmen 18,000 112,000
---------- ------------
Net cash used in investing activities (2,464,000) (733,000)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued under stock
option plans 141,000 87,000
Common stock repurchased (654,000) -
Tax benefit from exercise of
stock options 108,000 -
---------- ------------
Net cash provided from financing
activities (405,000) 87,000
---------- -------------
Net decrease in cash and cash
investments (360,000) (247,000)
Cash and cash investments, beginning
of period 495,000 346,000
---------- -------------
Cash and cash investments, end of
period $135,000 $99,000
========== =============
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $30,000 $19,000
========== =============
Cash paid for income taxes $636,000 $457,000
========== =============
The accompanying notes are an integral part of
these consolidated statements.
6
CIRCON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
General
The accompanying condensed consolidated financial statements include the
accounts of Circon Corporation (the Company) and its subsidiaries, Circon GmbH
(a German corporation), Circon Canada Inc. (a Canadian corporation) and Circon
Export Corporation, which operates as a Foreign Sales corporation (FSC) under
federal income tax laws. All significant intercompany transactions and accounts
have been eliminated in consolidation.
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. It is suggested
that these condensed consolidated financial statements be read in conjunction
with the statements and notes thereto included in the Company's annual report
for the year ended December 31, 1994.
The information reflects all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and the results of operations for
the interim periods. Certain reclassifications have been made to prior period
financial statements to conform to the current period presentation. The results
for the interim periods are not necessarily indicative of the results expected
for any other period or for the entire year.
(1) Inventories
Inventories include costs of materials, labor and manufacturing overhead.
Inventories are priced at the lower of cost (first-in, first-out) or market and
are summarized as follows:
(Unaudited)
December 31, June 30,
1994 1995
Raw materials $ 3,010,000 $ 3,392,000
Work in process 8,325,000 9,993,000
Finished goods 5,136,000 6,141,000
----------- -----------
$16,471,000 $19,526,000
=========== ===========
(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 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 sheets.
The following summarizes the Company's marketable securities at December
31, 1994 and June 30, 1995:
Unaudited
June 30,
1994 1995
---------- -----------
Held-to-maturity:
Municipal obligations $15,035,000 $15,636,000
U.S. government securities 1,356,000 1,074,000
Other 896,000 -
Available-for-sale:
Preferred stock in utility
companies 3,123,000 3,071,000 (A)
----------- -----------
$20,410,000 $19,781,000
=========== ===========
(A) The initial cost of these securities was $3,167,000. The unrealized
losses, net of tax benefit, of $64,000 at June 30, 1995 have been reflected in
shareholders' equity.
Income on the above marketable securities was $469,000 and $580,000 in 1994
and 1995, respectively, and is included in interest income (expense) in the
accompanying consolidated statements of operations.
(3) Notes Payable
The Company has available an unsecured revolving credit line for $15
million, with an interest rate of the bank's prime rate, or 1.5 points over an
offshore rate. Terms of the banking arrangement restrict payment of dividends,
and require the achievement of certain profitability levels and financial
ratios.
In addition, the bank agreement contains certain subjective
acceleration clauses related to the Company's financial conditions and
operations.
(4) Aquisition of Cabot Medical Corporation
On April 25, 1995, Circon Corporation and Cabot Medical Corporation
announced the signing of a definitive agreement to merge in a stock-for-stock
transaction.
Under the terms of the agreement by the boards of both companies, Cabot
shareholders would receive 0.415 shares of Circon common stock in exchange for
each Cabot share held. This will result in approximately 4.7 million new shares
of Circon common stock being issued to Cabot shareholders.
The merger is subject to various conditions including the approval of
shareholders of both companies and the receipt by Circon of financing of
approximately $50 million to cover the potential early retirement of Cabot's
convertible subordinated notes. The merger is expected to close during the
third calendar quarter of 1995.
ITEM 2. Management's Discussion and Analysis of Operations and Financial
Condition
RESULTS OF OPERATIONS
Three Months Ended June 30, 1995
Compared to Three Months Ended June 30, 1994
Sales
Circon experienced record sales of $25.9 million. The $4.0 million or 18%
sales increase over second quarter 1994 resulted from growth in both the
Domestic and International sector.
Sales by the U.S. direct sales force were up 18% to $20.0 million due to
the excellent reception afforded Circon's new Vaportrode electrode and rotating
resectoscope system by urologists since their February 1995 introduction.
International sales of $4.4 million were up 25% compared to second quarter 1994
due to improving economic trends in most countries coupled with the strong
dealer interest in Circon's new products.Industrial and OEM sales were $1.5
million, 14% increase over the comparable 1994 quarter and are not an area of
emphasis.
Price increases were negligible between the 1995 and 1994 second quarters,
therefore, the majority of the 18% sales increase related to volume.
Gross Profit
Second quarter 1995 gross profit was $14.0 million compared to $11.6
million for the same 1994 period. As a percent of sales, gross profit was 54.2%
, up from the 52.9% of the second quarter 1994. Pricing has stabilized and
manufacturing efficiencies are being achieved as a result of higher production
volumes.
Operating Expenses
Total operating expenses of $11.5 million for the second quarter 1995 are
up 10% over the comparable 1994 period, however, this percentage increase is
well below the 18% increase in sales. Total expenses as a percentage of sales
are down to 44.4% from 47.6% in the second quarter 1994. R&D expenditures
totaled $1.9 million for second quarter 1995, essentially flat with the same
1994 quarter. R&D expenditures have been maintained at a constant level so as a
percentage of sales have dropped to 7.5% for the current quarter, compared to
9.1% for second quarter 1994.
Selling, general and administrative expenses of $9.6 million for second
quarter 1995 are up 13% compared to $8.4 million for 1994, but are up less than
the percentage sales growth for the period. Increased sales commissions, and
marketing expenses associated with new product introductions are the major
contributors to the expense increase.
Income from Operations
Operating income was up 120% to $2.5 million for the second quarter due to
increased sales and the gross profit and operating expense trends discussed
above.
Interest Income, Other Expenses
Interest income and other expenses totaled $176K in the second quarter
1995 compared to $158K in the same 1994 period. Interest income was $256,000
for the second quarter 1995 compared to $190,000 for the comparable 1994 period,
due to higher interest rates.
Income Taxes
Income taxes for the second quarter 1995 were $882,000 compared to
$421,000 for 1994 simply reflecting the higher income before taxes.
Net Income
As a result of items discussed above, second quarter 1995 net income
increased to $1.8 million from $0.9 million in second quarter 1994. Earnings
per share was $0.22 compared to $0.11 in 1994.
Six Months Ended June 30, 1995
Compared to Six Months Ended June 30, 1994
Sales
Sales of $48.4 million for the first half of 1995 compare favorably to
$42.8 million for the same 1994 period.
Sales by the U.S. sales force are up 11.9% compared to 1994, reflecting
the improved U.S. healthcare environment and acceptance of the new Vaportrode
electrode and rotating resectoscope system.
International sales are up 25.3% for first half 1995 compared to 1994
primarily due to our outstanding new products and increased market penetration.
Price increases between first half 1995 and first half 1994 have been
negligible, so that all growth reflects high unit volume.
Gross Profit
Gross profit was $25.9 million for the first six months of 1995, up 15%
compared to $22.5 million for 1994. In addition, gross profit as a percent of
sales also improved, reaching 53.5% compared to 52.7% for 1994. Higher
production volumes have resulted in manufacturing efficiencies, thereby
increasing gross profit percentage.
Operating Expenses
Operating expenses totaled $21.9 million, representing an increase in
dollar value, but well below percentage sales growth. Total expenses as a
percentage of sales are down to 45.2% from 47.3% for first half 1994.
R&D expenditure were roughly level dollars, $3.8 million compared to $4.0
million for 1994, but have declined from 9.3% of sales in 1994 to 7.8% for first
half 1995.
Sales and marketing expenses are up 12% for the first half 1995, but have
decreased as a percentage of sales for the same period. Commissions have
increased due to higher sales levels and marketing expenses associated with new
product introductions are up, both contributing to the expense increase.
Operating Income
Operating income for the first half grew 76% to $4.0 million due to the
sales increase and expense trends discussed above.
Interest income totaled $519,000 for the first half 1995 compared to
$251,000 for 1994.
Liquidity and Capital Resources
In September 1994, the company extended its $15.0 million revolving bank
credit line. The agreement matures in May 1996 and includes annual renewals
after that time.
As of June 30, 1995, the Company had cash and marketable securities
totaling $19.9 million.
Non-cash charges for depreciation and amortization aggregated $917,000 for
the first half 1995 and $1.7 million was used to purchase plant and equipment
(net of retirements).
On April 24, 1995, Circon entered into an agreement to merge with Cabot
Medical Corporation in a stock for stock transaction to be accounted for as a
pooling of interests. As a result of this merger, Circon must be prepared to
cover the potential retirement of Cabot's $67 million convertible subordinated
notes. Accordingly, a new revolving bank credit line for $75 million has been
arranged. This new credit line will replace the $15.0 million credit line
discussed above. The agreement for the $75 million credit line has not yet
been finalized but will be completed before the end of August 1995.
The company believes that cash flow from operations, existing cash and
marketable securities and available cash from bank credit facilities are
adequate to fund the company's existing operations for the foreseeable future.
PART II. OTHER INFORMAT
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on June 1, 1995. The
following table shows voting information for each item voted upon:
Proposal Voting Tabulation
-------------------------------------------------
Election of Directors
Nominee For Withhold/Against Broker Non-Vote
------- ------- --------------- --------------
Rudolph R. Schulte 6,388,012 33,967 1,548,724
For Against Abstain Broker Non-Vote
Stock Option Plan 3,471,522 1,052,524 55,430 3,391,227
Approval of 1995
Stock Option Plan 3,601,447 1,044,282 130,800 3,194,174
Amendment of Certificate
of Incorporation 4,013,744 1,518,734 54,255 2,383,970
Recommendation to
Declare a Dividend 1,142,925 3,309,830 76,594 3,441,354
Ratification of Selection
of Accountants 6,398,588 10,606 12,785 1,548,724
The total number of shares of Circon Corporation Common Stock
outstanding as of April 4, 1995, the record date for the Annual Meeting, was
7,970,703.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CIRCON CORPORATION
Registrant
August 11, 1995
Date RICHARD A. AUHLL
President
Chief Executive Officer
August 11, 1995
Date R. BRUCE THOMPSON
Executive Vice President
Chief Financial Officer
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<LEGEND>
The user should be aware that this document is NOT complete, and should refer to
the 10-Q for a complete set of financial information.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 99,000
<SECURITIES> 19,781,000
<RECEIVABLES> 18,933,000
<ALLOWANCES> 663,000
<INVENTORY> 19,536,000
<CURRENT-ASSETS> 63,102,000
<PP&E> 33,734,000
<DEPRECIATION> (862,000)
<TOTAL-ASSETS> 98,726,000
<CURRENT-LIABILITIES> 11,948,000
<BONDS> 0
<COMMON> 59,532,000
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<OTHER-SE> (293,000)
<TOTAL-LIABILITIES-AND-EQUITY> 98,726,000
<SALES> 48,410,000
<TOTAL-REVENUES> 48,410,000
<CGS> 22,526,000
<TOTAL-COSTS> 21,865,000
<OTHER-EXPENSES> (180,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,000
<INCOME-PRETAX> 4,358,000
<INCOME-TAX> 1,412,000
<INCOME-CONTINUING> 2,946,000
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<NET-INCOME> 2,946,000
<EPS-PRIMARY> .35
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