-----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, dVxiPIsuRumj/8nUlUEKPt988VkPx7KGBjrKnp3EtcR5jZbm8EKb5e9VKfhPsddp OluZwySthcj8kd4nRU761Q== 0000719727-95-000011.txt : 19950516 0000719727-95-000011.hdr.sgml : 19950516 ACCESSION NUMBER: 0000719727-95-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIRCON CORP CENTRAL INDEX KEY: 0000719727 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [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: 95539131 BUSINESS ADDRESS: STREET 1: 460 WARD DR CITY: SANTA BARBARA STATE: CA ZIP: 93111 BUSINESS PHONE: 8059670404 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED March 31, 1995 COMMISSION FILE NO. 0-12025 CIRCON CORPORATION (Exact Name of Registrant as Specified in Its Charter) Delaware 95-3079904 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6500 Hollister Avenue, Santa Barbara, California 93117-3019 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (805) 968-5100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Number of Common Shares Outstanding at March 31, 1995: 7,970,703 PART I. FINANCIAL INFORMATION Item 1. Financial Statements CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1994 AND MARCH 31, 1995 ASSETS (Unaudited) December 31, March 31, 1994 1995 CURRENT ASSETS: Cash and temporary cash investment $ 346,000 $ 611,000 Marketable securities 20,410,000 20,715,000 Accounts receivable, net of allowance of $627,000 in 1994, and $665,000 in 1995 17,607,000 16,935,000 Inventories 16,471,000 17,809,000 Prepaid expenses and other assets 1,930,000 1,919,000 Deferred tax asset - current 2,639,000 2,639,000 Total current assets 59,403,000 60,628,000 PROPERTY, PLANT, AND EQUIPMENT, at cost, net of accumulated depreciation and amortization 32,010,000 33,246,000 OTHER ASSETS: Deferred tax asset - noncurrent 739,000 739,000 Other, at cost, net of accumulated amortization 2,824,000 2,782,000 Total assets 94,976,000 $ 97,395,000 The accompanying notes are an integral part of these consolidated statements. CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1994 AND MARCH 31, 1995 LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) December 31, March 31, 1994 1995 CURRENT LIABILITIES: Accounts payable 3,649,000 3,940,000 Accrued liabilities 6,692,000 7,088,000 Customer deposits 473,000 486,000 Total current liabilities 10,814,000 11,514,000 NONCURRENT LIABILITIES Deferred income taxes 5,276,000 5,354,000 Capital lease obligations and other 327,000 192,000 Total noncurrent liabilities 5,603,000 5,546,000 COMMITMENTS SHAREHOLDERS' EQUITY Preferred stock, $ .01 par value: 1,000,000 shares authorized, none outstanding Common stock; $ .01 par value: 50,000,000 shares authorized; 7,954,333 and 7,970,703 outstanding at December 31, 1994 and March 31,1995 59,445,000 59,511,000 Unrealized losses on Marketable Securities (314,000) (166,000) Cumulative translation adjustment (341,000) 107,000 Retained earnings 19,769,000 20,883,000 Total shareholders' equity 78,559,000 80,335,000 Total liabilities and shareholders' equity $ 94,976,000 $ 97,395,000 The accompanying notes are an integral part of these consolidated statements. CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATION Three Months Ended March 31, (Unaudited) (Unaudited) 1994 1995 NET SALES $ 20,833,000 $ 22,474,000 COST OF SALES 9,904,000 10,637,000 GROSS PROFIT 10,929,000 11,837,000 OPERATING EXPENSES: Research and development 1,995,000 1,827,000 Selling, general and administrative 7,801,000 8,529,000 Total operating expenses 9,796,000 10,356,000 INCOME FROM OPERATIONS 1,133,000 1,481,000 Interest income, net 84,000 329,000 Other income (expense), net (3,000) (166,000) INCOME BEFORE PROVISION FOR INCOME TAXES 1,214,000 1,644,000 Provision for income taxes 425,000 530,000 NET INCOME $ 789,000 $ 1,114,000 Net Earnings Per Share $ 0.10 $ 0.13 Weighted average number of shares outstanding 8,144,667 8,433,662 The accompanying notes are an integral part of these consolidated statements. CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES 1994 1995 Net income 789,000 1,114,000 Adjustments to reconcile net income to cash provided from (used in) operating activities: Depreciation and amortization 532,000 394,000 Deferred income taxes - 78,000 Change in assets and liabilities: Accounts receivable, net 568,000 672,000 Prepaid and other assets (129,000) 11,000 Other assets 45,000 14,000 Accounts payable 783,000 291,000 Accrued liabilities 378,000 396,000 Customer deposits 71,000 13,000 Other long term liabilities (213,000) (135,000) Total adjustments 1,530,000 396,000 Net cash provided from operating activities 2,319,000 1,510,000 CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, (Unaudited) (Unaudited) CASH FLOWS FROM INVESTING ACTIVITIES 1994 1995 Investments in marketable securities (134,000) (157,000) Purchases of plant and equipment (2,248,000) (1,602,000) Cumulative translation adjustment (24,000) 448,000 Net cash used in investing activities (2,406,000) (1,311,000) CASH FLOWS FROM FINANCING ACTIVITIES Common stock issued under stock option plan 59,000 66,000 Net cash provided from financing activities 59,000 66,000 Net decrease in cash and cash investments (28,000) 265,000 Cash and cash investments, beginning of period 495,000 346,000 Cash and cash investments, end of per $ 467,000 $ 611,000 SUPPLEMENTAL DISCLOSURES Cash paid for interest $ 16,000 $ 10,000 Cash paid for income taxes $ 53,000 $ 153,000 The accompanying notes are an integral part of these consolidated statements. CIRCON CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1995 General The accompanying condensed consolidated financial statements include the accounts of Circon Corporation (the Company) and its subsidiaries, Circon GmbH (a German corporation), Circon Canada Inc. (a Canadian corporation) and Circon Export Corporation, which operates as a Foreign Sales corporation (FSC) under federal income tax laws. All significant intercompany transactions and accounts have been eliminated in consolidation. The condensed consolidated financial statements included herein have been prepared by the Company, without audit, in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. It is suggested that these condensed consolidated financial statements be read in conjunction with the statements and notes thereto included in the Company's annual report for the year ended December 31, 1994. The information reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and the results of operations for the interim periods. The results for the interim periods are not necessarily indicative of the results expected for any other period or for the entire year. (1) Inventories Inventories include costs of materials, labor and manufacturing overhead . Inventories are priced at the lower of cost (first-i are summarized as follows: (Unaudited) December 31, March 31, 1994 1995 Raw materials $ 3,010,000 $ 2,962,000 Work in process 8,325,000 8,432,000 Finished goods 5,136,000 6,415,000 $16,471,000 $17,809,000 =========== =========== (2) Marketable Securities Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities". SFAS 115 requires that debt and equity securities be carried at fair value unless the Company has the positive intent and ability to hold debt securities to maturity. Debt and equity securities must be classified into one of three categories: held-to-maturity, available-for-sale or trading securities. The net effect on the January 1, 1994 consolidated balance sheet of adopting SFAS 115 was not material to the consolidated financial statements. The Company classifies their investments as held-to-maturity and available-for-sale and does not hold any trading securities. Held-to-maturity securities are recorded at cost. Adjustments to market value for available-for - -sale maturities are recorded as a separate component in the shareholders' equity section of the consolidated balance sheet. The following summarizes the Company's marketable securities at December 31, 1994 and March 31, 1995: Unaudited March 31, 1994 1995 Held-to-maturity: Municipal obligations $15,035,000 $15,342,000 U.S. government securities 1,356,000 1,362,000 Other 896,000 913,000 Available-for-sale: Preferred stock in utility companies 3,123,000 3,098,000 (A) $20,410,000 $20,715,000 =========== =========== (A) The initial cost of these securities was $3,595,000. The unrealized losses, net of tax benefit, of $166,000 at March 31, 1995 have been reflected in shareholders' equity. Income on the above marketable securities was $257,000 and $330,000 in 1994 and 1995, respectively, and is included in interest income (expense) in the accompanying consolidated statements of operations. (3) Notes Payable The Company has available an unsecured revolving credit line for $15 million, with an interest rate of the bank's prime rate, or 1.5 points over an offshore rate. Terms of the banking arrangement restrict payment of dividends, and require the achievement of certain profitability levels and financial ratios. In addition, the bank agreement contains certain profitability levels and financial ratios. In addition, the bank agreement contains certain subjective acceleration clauses related to the Company's financial conditions and operations. (4) Subsequent Event On April 25, 1995, Circon Corporation and Cabot Medical Corporation announced the signing of a definitive agreement to merge in a stock-for-stock transaction. Under the terms of agreement by the boards of both companies, Cabot shareholders would receive 0.415 shares of Circon common stok in exchange for each Cabot share held. This will result in approximately 4.7 million new shares of Circon common stock being issued to Cabot shareholders. The merger is subject to various conditions including the approval of shareholders of both companies and the receipt by Circon of financing of approximately $50 million to cover the potential early retirement of Cabot's convertible subordinated notes. The merger is expected to close during the third calendar quarter of 1995. ITEM 2. Management's Discussion and Analysis of Operations and Financial Condition RESULTS OF OPERATIONS Three Months Ended March 31, 1995 Compared to Three Months Ended March 31, 1994 Sales Total sales of $22.5 million were the highest sales of any Circon first quarter. The $1.6 million or 8% sales increase over the first quarter 1994 resulted from growth in both the domestic and international sector. Sales by the U.S. direct sales force were 16.7 million, up 6% from the first quarter 1994 due to improving trends in the U.S. healthcare market. International sales increased 25% to $4.2 million when compared to the first quarter 1994 due to improved European dealer sales. Industrial and OEM sales were $1.5 million compared to $1.7 million in 1994 and are not expected to grow. Price increases were negligible between the two quarters, therefore the majority of the 8% sales increase related to volume. Gross Profit Gross profit was $11.8 million for the first three months of 1995 compared to $10.9 million in the same 1994 period. As a percent of sales gross profit was 52.7%, up slightly over the 52.5% of the first quarter 1994, and up solidly over the last two quarters of 1994 due to more efficient manufacturing and favorable sales mix. Operating Expenses Total operating expenses of $10.4 million for the first quarter 1995 were up 5.7% from $9.8 million in the same 1994 period. As a percentage of sales, total operating expenses were 46% of sales, down from 47% last year. R&D expenditures totalled $1.8 million or 8% of sales. This was down slightly from $2.0 million or 10% of sales for the first quarter 1994. R&D expenses are expected to be maintained at their current level, but as a percent of sales are now expected to decline. Selling, general and administrative expenses of $8.5 million for the first quarter 1995 increased 9% compared to $7.9 million for 1994. Promotional efforts associated with the launch of Circon's new VaporTrode electrode and Continuous Flow Rotating Resectoscope system occurred in the first quarter 1995. Income from Operations First quarter 1995 operating income of $1.5 million was up from $1.1 million in the first quarter 1994 reflecting the improvement in gross profit and lower R&D expenditures. Interest Income, Other Expenses Interest income and other expense totalled $163,000 in the first quarter 1995 compared to $81,000 in the same 1994 period. Interest income of $329,000 increased from $84,000 in the prior year, due to higher interest rates, and was partially offset by realized losses on marketable securities of $58,000 as compared to a $82,000 loss in 1994. Other income and expense included $61,000 net foreign exchange loss, $15,000 franchise taxes and 26,000 other expense compared to $2,000 net foreign exchange gain in the first quarter 1994. Income Taxes Income taxes in the first quarter 1995 were $530,000 compared to $425,000 in the first quarter of 1994. The decrease in the effective tax rate from 35% to 32% resulted from increased foreign sales which allow for reduced taxes due to Circon's foreign sales corporation. Net Income First quarter 1995 net income totalled $1.1 million compared to $0.8 million in the first quarter 1994. Earnings per share was $0.13 compared to $0.10 in 1994. LIQUIDITY AND CAPITAL RESOURCES In September 1994, the Company extended its $15.0 million revolving bank credit line. The new agreement matures in May 1996 and includes annual renewals after that time. As of March 31, 1995 the Company had cash and marketable securities totalling $21.3 million. Circon's cash and marketable securities provides financial strength and flexibility to fund future growth and product development both internally and through potential acquisitions. The Company will require $0.6 million cash in addition to funding $9.9 million prior to March 31, 1995, for a new facility in Santa Barbara, California. The building was occupied in January 1995 coterminous with the lease expiring on the building previously occupied by the corporate headquarters. Non-cash charges for depreciation and amortization aggregated $394,000 for the first quarter 1995, and $1.6 million was used to purchase plant and equipment (net of retirements). See Consolidated Statements of Cash Flows and related notes thereto. The Company believes that cash flow from operations, existing cash and marketable securities and available cash from bank credit arrangements are adequate to fund the Company's existing operations for the foreseeable future. On April 24, 1995 Circon entered into an agreement to merge with Cabot Medical Corporation in a stock for stock transaction to be accounted for as a pooling of interests. See Note (4) Subsequent Event. As a result of this merger, Circon must be prepared to cover the potential retirement of Cabot's $67 million convertible subordinated notes. Accordingly, Circon is arranging for approximately $75 million of bank financing to be available should the convertible note be tendered after the merger. ITEM 5. Other Information On April 24, 1995, Circon Corporation entered into an agreement with Cabot Medical Corporation whereby Circon and Cabot would merge in a stock-for- stock transaction to be accounted for as a pooling of interests. Under the terms of the agreement, Cabot shareholders would receine 0.415 shares of Circon common stock in exchange for each share of Cabot stock. This exchange ratio will result in approximately 4.7 million shares of Circon stock being issued to Cabot shareholders. The closing of the merger is subject to various conditions including but not limited to the approval by the shareholders of both companies, receipt by Circon of a financing commitment of approximately $50 million to cover the potential early retirement of Cabot's convertible notes, and receipt of fairness opinions and opinions regarding the ability to account for the transaction as a pooling of interests. The merger is expected to close during the third quater of 1995. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CIRCON CORPORATION Registrant 05/12/95 Date RICHARD A. AUHLL President Chief Executive Officer 05/12/95 Date R. BRUCE THOMPSON Executive Vice President Chief Financial OfficerFORM 10-Q -----END PRIVACY-ENHANCED MESSAGE-----