-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, M7BT0TEIGC9BkjKuiZvc8BHiELVWY34+IoqW1xXQVlfoDrFWoREy3rv9f0Bxk3ga C63dsDubXOa4wSz6CLeFFw== 0000719727-94-000005.txt : 19941116 0000719727-94-000005.hdr.sgml : 19941116 ACCESSION NUMBER: 0000719727-94-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIRCON CORP CENTRAL INDEX KEY: 0000719727 STANDARD INDUSTRIAL CLASSIFICATION: 3845 IRS NUMBER: 953079904 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12025 FILM NUMBER: 94560104 BUSINESS ADDRESS: STREET 1: 460 WARD DR CITY: SANTA BARBARA STATE: CA ZIP: 93111 BUSINESS PHONE: 8059670404 10-Q 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1993 AND SEPTEMBER 30, 1994 ASSETS (Unaudited) December 31, September 30, 1993 1994 CURRENT ASSETS: Cash and temporary cash investment $ 495,000 $ 786,000 Marketable securities 21,810,000 20,361,000 Accounts receivable, net of allowance of $555,000 in 1993, and $605,000 in 1994 14,803,000 15,930,000 Inventories 17,632,000 17,296,000 Prepaid expenses and other assets 3,634,000 3,763,000 Total current assets 58,374,000 58,136,000 PROPERTY, PLANT, AND EQUIPMENT, at cost, net of accumulated depreciation and amortization 25,580,000 30,577,000 OTHER ASSETS, at cost, net of accumulated amortization 3,591,000 3,455,000 Total assets 87,545,000 $ 92,168,000 The accompanying notes are an integral part of these consolidated statements. 2 CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1993 AND SEPTEMBER 30, 1994 LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) December 31, September 30, 1993 1994 CURRENT LIABILITIES: Accounts payable 2,822,000 3,774,000 Accrued liabilities 5,313,000 5,911,000 Customer deposits 392,000 473,000 Income taxes payable 886,000 Total current liabilities 8,527,000 11,044,000 NONCURRENT LIABILITIES Deferred income taxes 3,827,000 3,741,000 Capital lease obligation and other 627,000 372,000 Total noncurrent liabilities 4,454,000 4,113,000 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 7,862,783 outstanding at December 31, 1993 and September 58,799,000 58,561,000 Unrealized losses on Marketable Securitie (171,000) Cumulative translation adjustment (193,000) (137,000) Retained earnings 15,958,000 18,758,000 Total shareholders' equity 74,564,000 77,011,000 Total liabilities and shareholders' equity $ 87,545,000 $ 92,168,000 The accompanying notes are an integral part of these consolidated statements. 3 CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended September 30, September 30, (Unaudited) (Unaudited) (Unaudited) (Unaudited) 1993 1994 1993 1994 NET SALES 22,450,000 22,469,000 65,062,000 65,232,000 COST OF SALES 10,806,000 10,863,000 30,220,000 31,102,000 GROSS PROFIT 11,644,000 11,606,000 34,842,000 34,130,000 OPERATING EXPENSES: Research and development 1,920,000 1,953,000 5,941,000 5,946,000 Selling, general and administ 8,368,000 8,016,000 25,336,000 24,262,000 Total operating expenses 10,288,000 9,969,000 31,277,000 30,208,000 INCOME FROM OPERATIONS 1,356,000 1,637,000 3,565,000 3,922,000 Interest income, net 141,000 127,000 421,000 378,000 Other income (expense), net 17,000 (41,000) 41,000 (53,000) INCOME BEFORE PROVISION FOR INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 1,514,000 1,723,000 4,027,000 4,247,000 Provision for income taxes 529,000 601,000 1,409,000 1,447,000 INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 985,000 1,122,000 2,618,000 2,800,000 Cumulative effect of accounti - - 204,000 - NET INCOME $ 985,000 $ 1,122,000 $ 2,822,000 $ 2,800,000 Earnings per Common Share and Common Equivalent Share: Earnings Before Cumulative Effect Of Accounting Change $ 0.12 $ 0.14 $ 0.32 $ 0.34 Cumulative effect of accounti - - 0.03 - Net Earnings Per Share $ 0.12 $ 0.14 $ 0.35 $ 0.34 Weighted average number of share 8,113,671 8,115,206 8,158,433 8,116,708
The accompanying notes are an integral part of these consolidated statements. 4 CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES 1993 1994 Net income 2,822,000 2,800,000 Adjustments to reconcile net income to cash provided from (used in) operating activities: Cumulative effect of accounting change (204,000) Depreciation and amortization 1,652,000 1,659,000 Deferred income taxes 1,017,000 (86,000) Change in assets and liabilities: Accounts receivable, net (35,000) (1,127,000) Inventories 318,000 336,000 Prepaid and other assets (1,043,000) (129,000) Other assets (352,000) 56,000 Accounts payable (118,000) 952,000 Accrued liabilities 307,000 598,000 Income taxes payable 173,000 573,000 Customer deposits 38,000 81,000 Other long term liabilities 350,000 (255,000) Total adjustments 2,103,000 2,658,000 Net cash provided from operating activiti 4,925,000 5,458,000 5 CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, (Unaudited) (Unaudited) CASH FLOWS FROM INVESTING ACTIVITIES 1993 1994 Investments in marketable securiti 478,000 1,278,000 Purchases of plant and equipment (4,759,000) (6,576,000) Cumulative translation adjustment (155,000) 56,000 Net cash used in investing activities (4,436,000) (5,242,000) CASH FLOWS FROM FINANCING ACTIVITIES Common stock issued under stock option plan 121,000 416,000 Common stock repurchased (654,000) Tax benefit from exercise of stock option 183,000 313,000 Net cash provided from financing activities 304,000 75,000 Net decrease in cash and cash investments 793,000 291,000 Cash and cash investments, beginning of period 559,000 495,000 Cash and cash investments, end of per $ 1,352,000 $ 786,000 SUPPLEMENTAL DISCLOSURES Cash paid for interest $ 63,000 $ 46,000 Cash paid for income taxes $ 1,045,000 $ 445,000 The accompanying notes are an integral part of these consolidated statements. 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994 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, 1993. The information reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and the results of operations for the interim periods. The results for the interim periods are not necessarily indicative of the results expected for any other period or for the entire year. (1) Inventories Inventories include costs of materials, labor and manufacturing overhead. Inventories are priced at the lower of cost (first-in, first-out) or market and are summarized as follows: (Unaudited) December 31, September 30, 1993 1994 Raw materials $ 4,402,000 $ 2,694,000 Work in process 9,472,000 12,293,000 Finished goods 3,758,000 2,309,000 $17,632,000 $17,296,000 7 (2) Marketable Securities Marketable securities are stated at the lower of cost or market value and consist of the following: (Unaudited) December 31, September 30, 1993 1994 Municipal obligations 17,527,000 16,309,000 Mutual bond funds 1,000,000 - Preferred stock of utility companies 3,080,000 2,964,000 Other 203,000 1.088,000 $ 21,810,000 $ 20,361,000 Interest income on the above marketable securities was $213,000 for the three months ending September 30, 1994. (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) Income Taxes In January 1993, the Company adopted Financial Accounting Standard No. 109, "Accounting for Income Taxes". 8 ITEM 2. Management's Discussion and Analysis of Operations and Financial Condition RESULTS OF OPERATIONS Three Months Ended September 30, 1994 Compared to Three Months Ended September 30, 1993 Sales Sales for the third quarter 1994 were $22.5 million, slightly above the third quarter 1993 and were the highest of any quarter. Worldwide medical sales were up 2% when compared to the third quarter of 1993. OEM and industrial sales decreased 18% between periods. The Company estimates that price increases of 1% are included in total sales between the third quarter 1994 and the third quarter 1993. During the past year, the U.S. healthcare reform debate has caused hospitals to stretch out orders. We have focused on maintaining market share in our current markets and believe that the three consecutive quarters of sales and income growth validate our strategy. Gross Profit Gross profit for the third quarter totalled $11.6 million, level with the comparable 1993 quarter. Gross profit was 51.7% of sales. As a percentage of sales, gross profit has maintained a reasonable level since early 1993 when healthcare reform initiatives began. Operating Expenses Total operating expenses of $10.0 million for the third quarter 1994 were down 3% or $0.3 million from the same period in 1993. 9 Expenditures for R&D were $2.0 million for the third quarter, up 2% from the third quarter of 1993. R&D expenditures remain at the desired level of about 9% of sales. Development efforts focused on products for our primary markets of urology, gynecology, laparoscopy and thoracoscopy. Selling, general and administrative expenses were down 4% to $8.0 million for the third quarter. Intensive efforts have been made to prioritize sales and marketing expenditures, capitalize on market opportunities and maintain our strong sales organization, while reducing overall expense levels. Income Third quarter 1994 net income of $1.1 million and operating income of $1.6 million were up from $1.0 million and $1.4 million, respectively, in the third quarter 1993. Earnings per share was $0.14 compared to $0.12 in 1993. The improved operating performance was achieved primarily through control of operating expenses. Interest income and other expense totalled $86,000 in the third quarter 1994 compared to $158,000 in the same 1993 period. Interest income of $196,000 decreased $15,000 from prior year and losses on marketable securities were $69,000 as compared to a $49,000 loss in 1993. Other income and expense included $30,000 net foreign exchange loss compared to $13,000 gain in the third quarter 1993. Nine Months Ended September 30, 1994 Compared to Nine Months Ended September 30, 1993 Sales Sales of $65.2 million for the first nine months of 1994 are slightly favorable to $65.1 million for the same 1993 period, and were the highest of any first nine month period. U.S. medical and international sales were flat compared to 1993 while sales to OEM and industrial customers were up 6% over the same period. The economic slowdowns in most European countries and Japan and healthcare reform in this country have had a negative impact on Circon's business. The Company estimates that price increases of 2% are included in total sales between the nine months of 1994 and 1993. 10 Gross Profit Gross profit was $34.1 million for nine months 1994 compared to $34.8 million for the same 1993 period. Circon's gross profit level of 52.3% of sales for the period demonstrates the basic profitability of our products resulting from excellent product quality and efficient manufacturing. Operating Expenses Total operating expenses of $30.2 million for the first nine months 1994 were down 3% or $1.1 million from the same 1993 period. Steps have been taken, throughout the nine month period, to bring Circon's expenditures into line with medium term sales expectations. R&D expenditures were $5.9 million, essentially level in the nine month comparison. Development efforts continue toward expanding the products offered to our primary markets of urology, gynecology, laparoscopy and thoracoscopy. Circon's sustained development efforts will result in over forty new products being introduced by the end of 1994. In addition, we are improving capabilities to design and manufacture hand instruments for our primary markets. Intensive efforts have been 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 expenses totalled $24.3 million for the first nine months of 1994, down 4% from last year. Income Net income totalled $2.8 million and earnings per share were $0.34 in the first nine months 1994. This was essentially flat compared to the same 1993 period while operating income was $3.9 million compared to $3.6 million in the 1993 period. Circon adopted SFAS 109 in the first quarter 1993, resulting in a one time $0.2 million increase in net income, recorded as a cumulative effect of accounting change. Interest income and other income and expense for the first nine months totalled $325,000 compared to $462,000 in 1993. Other income and expense included a $31,000 loss on net foreign exchange compared to a $40,000 gain in 1993, and recognition of $174,000 of realized and unrealized losses on marketable securities as compared to $126,000 of losses in 1993. 11 LIQUIDITY AND CAPITAL RESOURCES In September 1994, the Company amended the bank credit agreement entered into in June 1993 for a $15.0 million revolving credit line to extend the maturity date to 1996. The credit agreement includes annual renewals after that time. As of September 30, 1994, the Company had cash and marketable securities totalling $21.1 million. The Company is using approximately $10.0 million to construct a new facility in Santa Barbara, California, three fourths of which has already been funded. The building will be occupied in January, 1994 coterminous with the lease expiring on the building that is currently being occupied by the corporate headquarters. Once the facility is complete, the Company may consider a sale, lease back or other financing arrangement. Non-cash charges for depreciation and amortization aggregated to $1.7 million for the first nine months of 1994. $6.6 million was used to purchase plant and equipment (net of retirements). See Consolidated Statements of Cash Flows and related Notes. 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. 12 PART III. OTHER INFORMATION ITEM 4. Submission of Matters to a vote of Security Holders The Annual Meeting of Shareholders was held on July 7, 1994. The following table shows voting information for each item voted upon: Proposal Voting Tabulation Election of Directors Nominee For Withhold/Against Broker Non-Vote Richard A. Auhll 6,750,997 31,625 644,602 Paul W. Hartloff, Jr. 6,750,997 31,625 644,602 For Against Abstain Broker Non-Vote Ratification of Selection of Auditors 6,688,385 10,830 83,407 644,602 The total number of shares of Circon Corporation Common Stock outstanding as of May 11, 1994, the record date for the Annual Meeting, was 7,825,689. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CIRCON CORPORATION Registrant November 14, 1994 Date RICHARD A. AUHLL President Chief Executive Officer November 14,1994 Date R. BRUCE THOMPSON Executive Vice President Chief Financial Officer 14 -----END PRIVACY-ENHANCED MESSAGE-----