FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR QUARTER ENDED March 31, 1996 COMMISSION FILE NO. 0-12025
CIRCON CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-3079904
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6500 Hollister Avenue, Santa Barbara, California 93117-3019
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (805) 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 March 31, 1996: 12,574,196
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND MARCH 31, 1996
ASSETS
(In thousands, except for share amounts)
(UNAUDITED)
December 31, March 31,
1995 1996
----------- -----------
CURRENT ASSETS:
Cash and temporary cash investments $ 17,586 $ 8,292
Marketable securities 6,496 585
Accounts receivable, net of allowance of
$1,807 in 1995 and $1,814 in 1996 26,539 27,569
Inventories 31,645 32,648
Prepaid expenses and other assets 2,627 3,412
Deferred income taxes 5,932 5,932
----------- ----------
Total current assets 89,233 78,438
PROPERTY, PLANT, AND EQUIPMENT, NET 53,750 54,395
OTHER ASSETS 36,824 36,088
---------- -----------
Total assets $ 181,399 $ 168,921
=========== ===========
The accompanying notes are an integral part of
these consolidated balance sheets.
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND MARCH 31, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands, except for share amounts)
(UNAUDITED)
December 31, March 31,
1995 1996
----------- ----------
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 15,857 $ 574
Accounts payable 7,728 5,426
Accrued liabilities 10,796 10,624
Customer deposits 1,079 1,191
----------- ----------
Total current liabilities 35,460 17,815
NONCURRENT LIABILITIES:
Long-term obligations 56,435 58,935
Deferred income taxes 2,251 2,608
Capital lease obligations and other 81 61
----------- ----------
Total noncurrent liabilities 58,767 61,604
SHAREHOLDERS' EQUITY:
Preferred stock: $0.01 par value
1,000,000 shares authorized, none
outstanding
Common stock: $0.01 par value
50,000,000 shares authorized
12,564,079 and 12,574,196 issued and outstanding
in 1995 and 1996 respectively 126 190
Additional paid-in capital 94,928 94,958
Minimum pension liability (143) (143)
Cumulative translation adjustment (513) 64
Accumulated Deficit (7,226) (5,567)
----------- ----------
Total shareholders' equity 87,172 89,502
Total liabilities and shareholders'
equity $ 181,399 $ 168,921
=========== =========
The accompanying notes are an integral part of
these consolidated balance sheets.
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March, 31
(In thousands, except per share amounts)
(UNAUDITED) (UNAUDITED)
1995 1996
---------- ---------
NET SALES $ 37,921 $ 39,962
Cost of sales 17,398 17,764
---------- ---------
GROSS PROFIT 20,523 22,198
OPERATING EXPENSES:
Research and development 2,612 2,975
Selling, general and administrative 15,844 15,645
---------- ----------
Total operating expenses 18,456 18,620
INCOME FROM OPERATIONS 2,067 3,578
Interest income 363 95
Interest expense (1,440) (1,128)
Other income (expense), net 53 (62)
---------- ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,043 2,483
Provision for income taxes 370 824
---------- -----------
NET INCOME $ 673 $ 1,659
========== ===========
EARNINGS PER SHARE $ 0.07 $ 0.13
========== ===========
Weighted Average Number of Shares of Common
Stock and Equivalents Outstanding 12,778 13,114
========== ==========
The accompanying notes are an integral part of
these consolidated statements.
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March, 31
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES 1995 1996
-------- -------
Net income 673 1,659
Adjustments to reconcile net
income to cash provided by (used in)
operating activities:
Depreciation and amortization 2,476 2,380
Deferred income taxes (40) 310
Change in assets and liabilities:
Accounts receivable 394 (1,030)
Inventories (935) (1,003)
Prepaid expenses and other assets (148) (785)
Other assets 272 123
Accounts payable 810 (2,302)
Accrued liabilities (1,706) (172)
Customer deposits 13 112
--------- ---------
Net cash provided by (used in) operating activities 1,809 (708)
--------- ---------
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March, 31
(In Thousands)
CASH FLOWS FROM INVESTING ACTIVITIES 1995 1996
-------- --------
Disposals of marketable securities, net 318 5,911
Purchases of property, plant and equipment (3,549) (2,365)
Cumulative translation adjustment 448 577
-------- --------
Net cash provided by (used in) investing activities (2,783) 4,123
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 151 82
Repayments of capital lease obligations (135) (20)
Repayments of long-term obligations (362) (12,783)
Tax benefit from exercise of stock options 244 12
Other (149) 0
--------- --------
Net cash used in financing activities (251) (12,709)
--------- --------
Net decrease in cash and temporary
cash investments (1,225) (9,294)
Cash and temporary cash investments, beginning
of period (reflects Cabot cash as of Dec 31, 1995) 2,882 17,586
--------- --------
Cash and temporary cash investments, end of period $ 1,657 $ 8,292
========= ========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 2,592 $ 66
======== ========
Cash paid for income taxes $ 176 $ 274
======== ========
The accompanying notes are an integral part of
these consolidated statements.
CIRCON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
General
The accompanying condensed consolidated financial statements
include the accounts of Circon Corporation (the Company) and its
subsidiaries, Cabot Medical (a U.S. corporation), Circon GmbH (a German
corporation), Circon Canada Inc. (a Canadian corporation) and Circon Export
Corporation, which operates as a Foreign Sales corporation (FSC) under
federal income tax laws. All significant intercompany transactions and accounts
have been eliminated in consolidation.
The condensed consolidated financial statements included herein
have been prepared by the Company, without audit, in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. It is suggested
that these condensed consolidated financial statements be read in conjunction
with the statements and notes thereto included in the Company's annual report
for the year ended December 31, 1995, and Form S-4 filed in connection with
the Cabot business combination.
On August 28, 1995, Circon Corporation ("Circon") merged with
Cabot Medical Corporation ("Cabot"), collectively referred to as "the
Company," in a transaction accounted for as a pooling of interests. Circon's
consolidated financial statements have been restated for all periods prior to
the merger to include the financial position, results of operations and cash
flows of Cabot.
The information reflects all adjustments (consisting only of normal
recurring adjustments and the restatement for the Cabot business combination)
which are, in the opinion of management, necessary for a fair presentation of
the financial position and the results of operations for the interim periods.
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 and are priced at the lower of cost (first-in, first-out) or market.
Inventories at December 31, 1995 and March 31, 1996 consist of the
following:
1995 1996
---------- ---------
Raw materials $ 11,017 $ 10,942
Work in process 12,243 11,957
Finished goods 8,385 9,749
---------- ---------
$ 31,645 $ 32,648
========== =========
(2) Long-Term Obligations
--------------------
Long-term obligations as of December 31, 1995 and March 31, 1996 consist
of the following:
1995 1996
--------- --------
Note payable to bank under a revolving
line of credit of $75,000,000, secured
by substantially all of the company's
assets, with interest at 0.95 points
above the Eurodollar rate (6.325% at
March 31, 1996). $ - $ 54,500
7.5% convertible subordinated notes 67,000 -
Industrial development authority bonds
due December 2, 2006 5,180 4,950
Other 112 59
Less: current maturities (15,857) (574)
--------- --------
$ 56,435 $ 58,935
========= ========
The Company has a $75 million revolving credit facility (the "Credit
Facility") which provides for direct borrowings and a maximum of $5 million
in letters of credit. The Company has the option to borrow money based
upon (I) the higher of the prime rate or an adjusted federal funds rate or
(ii) an adjusted eurodollar rate. The unused portion of the Credit
Facility has a commitment fee which ranges from .1875% to .375%.
The Credit Facility, which expires August 1, 2001, contains certain
restrictive financial covenants and is secured by substantially all of
the assets of the Company.
The Company has a letter of credit facility in the amount of
approximately $5,327 as of March 31, 1996 underlying $7,000 of tax
exempt Industrial Development Authority Bonds (the "Bonds") issued
in December 1991 with a 15 year maturity requiring monthly interest
payments and annual principal payments. The letter of credit has a
renewable 5 year term and carries an annual fee of 1% of the
outstanding bond principal amount. The bonds are subject to weekly
repricing at an interest rate based on the remarketing agents'
professional judgment and prevailing market conditions at the time.
The Bonds and the letter of credit facility are collateralized by the
Company's two Langhorne, Pennsylvania operating facilities. These
facilities had a net carrying value of $5,181 as of March 31, 1996.
During the first quarter of 1996 the Company repurchased all
but $39,000 of the $67,000,000 convertible notes. In April the Company
repurchased the remaining $39,000 of the convertible note. Approximately
$54.5 million of the Credit Facility and $12.5 million of available
cash was used to repurchase these notes.
Future principal maturities of the Industrial Development Bonds
and the Credit Facility are as follows:
1996 $ 574
1997 370
1998 390
1999 405
2000 430
Thereafter 57,340
---------
$ 59,509
=========
ITEM 2. Management's Discussion and Analysis of Operations and Financial
Condition
RESULTS OF OPERATIONS
---------------------
Three Months Ended March 31, 1996
Compared to Three Months Ended March 31, 1995
Sales
-------
Total sales of $40.0 million were up 5.4% over first quarter 1995.
U.S. sales force sales and international sales increased 9% and 7%,
respectively. These were partially offset by a 19% decrease in dealer
sales and a 16% decrease in industrial sales. Price increases accounted
for 1% of the sales increase.
Gross Profit
-------------
First quarter gross profit totaled $22.2 million or 55.5% of sales
compared to $20.5 million or 54.1% for the same period last year.
The improvement was the result of increased manufacturing efficiencies
and sales of higher margin products.
Operating Expense
-----------------
Total operating expenses increased 1% over first quarter 1995 as
compared to a 5.4% sales increase. Selling and general administrative
expense decreased 1.2% reflecting economies gained from the merger
of Circon and Cabot.
Research and development expenditures totaled $3.0 million, up
14% over prior year reflecting continued emphasis on new product
development. As a percent of sales, R&D expense was 7.4% compared
to 6.9% for prior year.
Income from Operations
-----------------------
Operating income was up 73% to $3.6 million due to increased
sales and gross profits and operating expense trends discussed above.
Interest and Other Expense
--------------------------
Interest expense of $1,128,000 decreased $312,000 from prior year
due to reduced loan balances. Interest income of $95,000 decreased
$268,000 from prior year due to lower investment balances.
Income Taxes
-------------
The provision for income taxes of 33% compared to 35.5% in 1995
decreased due to the ability of the company to utilize some of the NOL from
Cabot.
Net Income
-----------
Net income of $1.7 million was up 147% over comparable 1995 due
to increased sales and higher profit margins.
Subsequent Events
------------------
The company will be closing Cabot Medical's smaller facility in
Langhorne, Pennsylvania, and taking other consolidating actions by the end
of the third quarter 1996. As a result of this consolidation and related tax
benefits, Circon is targeting after tax benefits of $0.8 million in 1996,
(including a credit of approximately $2.0 million to the provision for income
taxes resulting from the liquidation of Cabot and related realization of
Cabot tax benefits), $1.8 million in 1997 and each subsequent year
compared to not taking these actions. The targeted one time operating cost,
associated with closing the facility, is $1.8 million in 1996, but will yield
$2.6 million in operating cost savings in 1997 and each subsequent year
compared to not consolidating.
This consolidation is targeted to produce a $0.8 million benefit in
the second quarter, (including a credit of approximately $2.0 million to the
provision for income taxes resulting from the liquidation of Cabot and
related realization of Cabot tax benefits), a $0.2 million cost in the third
quarter and a benefit of $0.2 million in the fourth quarter, for a full year
1996 after tax benefit of $0.8 million. In the years 1997 and beyond, the
after tax benefit is targeted for $0.45 million per quarter or $1.8 million
per year.
The major costs associated with closing the facility and relocating
the production activities are targeted to occur in the second quarter and
total $1.8 million for 1996. By the fourth quarter, operating savings of
$0.3 million are targeted. In the years 1997 and beyond, this consolidation
is targeted to produce operational savings of $0.65 million per quarter
or $2.6 million per year.
Liquidity and Capital Resources
--------------------------------
Circon has a $75.0 million secured revolving credit line with a
syndicate of banks. $50.5 million of this facility was used to repurchase
Cabot notes in January 1996 (see note 2).
As of March 31, 1996, the company had cash and marketable
securities totaling $8.9 million.
The company believes that cash flow from operations, existing
cash and marketable securities and available cash from bank credit
facilities are adequate to fund the company's existing operation for the
foreseeable future.
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
May 14, 1996
------------ -----------------
Date RICHARD A. AUHLL
President
Chief Executive Officer
May 14, 1996
------------ -----------------
Date R. BRUCE THOMPSON
Executive Vice President
Chief Financial Officer
[TYPE]EX-27
[ARTICLE] 5
[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]
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-END] MAR-31-1996
[CASH] 8,292,000
[SECURITIES] 585,000
[RECEIVABLES] 29,383,000
[ALLOWANCE] 1,814,000
[INVENTORY] 32,648,000
[CURRENT-ASSETS] 78,438,000
[PP&E] 88,395,000
[DEPRECIATION] 34,000,000
[TOTAL-ASSETS] 168,921,000
[CURRENT-LIABILITIES] 17,815,000
[BONDS] 0
[COMMON] 95,148,000
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] (79,000)
[TOTAL-LIABILITIES-AND-EQUITY] 168,921,000
[TOTAL-REVENUES] 39,962,000
[CGS] 17,764,000
[TOTAL-COSTS] 18,620,000
[OTHER-EXPENSES] 62,000
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 1,128,000
[INCOME-PRETAX] 2,483,000
[INCOME-TAX] 824,000
[INCOME-CONTINUING] 1,659,000
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 1,659,000
[EPS-PRIMARY] 0.13
[EPS-DILUTED] 0.13
</TABLE>
