SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended April 29, 1995
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission File Number 0-14343
CABOT MEDICAL CORPORATION
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(Exact name of registrant as specified in its charter)
NEW JERSEY 23-2240207
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2150 Cabot Boulevard West, Langhorne, Pennsylvania 19047
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(Address of principal executive offices and zip code)
Registrant`s telephone number, including area code (215) 752-8300
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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 (or for a shorter period that the registrant was
required to file such reports), and (2) has been sub-ject to such filing
requirements for the past 90 days.
Yes X No
-------- ________
Indicate the number of shares outstanding of each of the issuer`s classes of
common stock, as of the latest practicable date.
Common Stock, no par value 10,359,165
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Class Outstanding at April 29, 1995
Page 1 of 19 pages
INDEX
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Page
Number
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Part I. Financial Information
Item 1. Consolidated Condensed Financial Statements
Consolidated Balance Sheets - April 29, 1995 and
October 29, 1994...............................................3
Consolidated Statements of Operations - Three and Six
Months Ended April 29, 1995 and April 30, 1994.................5
Consolidated Statements of Shareholders' Equity - Six
Months Ended April 29, 1995....................................6
Consolidated Statements of Cash Flows - Six Months Ended
April 29, 1995 and April 30, 1994..............................7
Notes to the Consolidated Condensed Financial
Statements.....................................................9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................11
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders.............15
Item 6. Exhibits and Reports on Form 8-K................................16
2
CABOT MEDICAL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
April 29, October 29,
--------- -----------
ASSETS 1995 1994
- --------------------------------------------------------------------------
(In Thousands) (Unaudited)
Current Assets:
Cash and cash equivalents $ 1,801 $ 2,129
Short-term investments 592 891
Accounts receivable, net 9,359 9,410
Inventories
Raw material 6,731 5,799
Work in process 2,587 1,394
Finished goods 5,367 5,859
-------- --------
Total inventories 14,685 13,052
Prepaid expenses and other current assets 1,172 821
Refundable income taxes 390 390
Deferred income taxes 310 310
-------- --------
Total current assets 28,309 27,003
-------- --------
Property, plant and equipment-at cost 33,586 31,479
Less accumulated depreciation
and amortization 9,819 7,836
-------- -------
Net property, plant and equipment 23,767 23,643
-------- --------
Intangible assets, net 35,006 36,509
Deferred income taxes 47 47
Other assets, net 2,424 2,576
-------- --------
TOTAL ASSETS $ 89,553 $ 89,778
======== ========
(continued)
3
CABOT MEDICAL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(continued)
April 29, October 29,
--------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
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(In Thousands, except number of shares (Unaudited)
and per share amounts)
Current Liabilities:
Current maturities of long-term obligations $ 716 $ 701
Accounts payable 1,683 1,370
Accrued restructuring charges 551 1,074
Accrued expenses 3,889 3,576
Accrued interest 891 887
Income taxes payable 59 ---
-------- --------
Total current liabilities 7,789 7,608
Long-term obligations, less current maturities 72,186 72,782
Deferred income taxes 357 357
-------- --------
Total liabilities 80,332 80,747
-------- --------
Shareholders' Equity:
Preferred stock-authorized 500,000 shares
of no par value; no shares issued and
outstanding --- ---
Common stock-authorized 50,000,000 shares
of no par value; issued and outstanding
10,359,165 and 10,185,682 shares, respectively
at stated value of $.01 per share 104 102
Additional paid-in-capital 30,657 30,327
Notes receivable from officers ( 569) ( 272)
Accumulated deficit (20,971) (21,126)
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Total shareholders' equity 9,221 9,031
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 89,553 $ 89,778
======== ========
See accompanying notes to consolidated condensed financial statements
4
CABOT MEDICAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, except per share
amounts) Three months ended Six months ended
April 29, April 30, April 29, April 30,
--------------------- ---------------------
1995 1994 1995 1994
-------- -------- -------- --------
Net sales $16,500 $17,186 $32,233 $33,902
Cost of sales 7,185 6,215 13,508 12,462
------- ------- ------- -------
Gross Profit 9,315 10,971 18,725 21,440
------- ------- ------- -------
Operating expenses:
Selling and administrative 6,431 6,468 12,911 12,567
Research and development 929 1,055 1,688 2,167
Amortization of intangibles 687 685 1,410 1,393
Restructuring ( 48) --- ( 188) ---
------- ------- ------- -------
7,999 8,208 15,821 16,127
------- ------- ------- -------
Operating income 1,316 2,763 2,904 5,313
------- ------- ------- -------
Interest income ( 35) ( 25) ( 72) ( 37)
Interest expense 1,437 1,430 2,867 2,848
Other income ( 17) ( 17) ( 135) ( 23)
------- ------- ------- -------
1,385 1,388 2,660 2,788
------- ------- ------- -------
Earnings(Loss) before income taxes ( 69) 1,375 244 2,525
Income tax expense (benefit) ( 5) 248 89 350
------- ------- ------- -------
Net earnings (loss) $ ( 64) $ 1,127 $ 155 $ 2,175
======= ======= ======= =======
Net earnings per common and
equivalent share:
Primary $ ( .01) $ .10 $ .02 $ .20
Fully diluted $ ( .01) $ .10 $ .02 $ .19
======= ======= ======= =======
Weighted average number of common
and equivalent share:
Primary 10,359 11,264 10,333 11,323
Fully diluted 10,359 11,271 10,333 11,327
See accompanying notes to consolidated condensed financial statements
5
CABOT MEDICAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
Six months ended April 29, 1995
Notes
Common Additional Receivable
(In Thousands, except Stock Paid-in- from Accumulated
share amounts) Issued Capital officers deficit Total
------ ------- -------- -------- -----
Balance, October 29, 1994 $102 $30,327 $ (272) $(21,126) $9,031
Issuance of 173,483 shares
under Stock Option Plans 2 330 (297) --- 35
Net earnings for the six
months ended April 29, 1995 --- --- --- 155 155
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Balance, April 29, 1995 $104 $30,657 $ (569) $(20,971) $9,221
==== ======= ======= ========= ======
6
CABOT MEDICAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
(In Thousands) April 29, April 30,
----------------------
1995 1994
----------- -----------
Cash Flows from operating activities:
Net earnings $ 155 $ 2,175
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 2,840 2,237
Provision for losses on accounts receivable ( 15) ( 108)
Net gain on disposal of an intangible asset ( 307) ---
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable 66 ( 332)
Increase in inventory (1,633) ( 727)
Increase in prepaid expenses and
other current assets ( 351) ( 265)
Decrease in refundable income taxes --- 1,181
Increase (decrease) in accounts payable
and accrued expenses 107 ( 734)
Increase in income taxes payable 59 95
-------- -------
Net cash provided by operating activities 921 3,522
Cash flows from investing activities:
Proceeds from maturity of short-term
investments 299 ---
Proceeds from the sale of an intangible asset 400 ---
Purchase of property, plant and equipment (1,355) (1,190)
Increase in intangible assets --- ( 147)
Increase in other assets ( 48) ( 407)
-------- -------
Net cash used in investing activities ( 704) (1,744)
Cash flows from financing activities:
Net decrease in short-term borrowings --- 5
Principal payments on capital lease
obligations ( 115) ( 113)
Proceeds from issuance of common stock 35 329
Payments for treasury stock --- ( 693)
Principal payments on Industrial
Development Authority Bonds ( 465) ( 465)
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Net cash used in financing activities ( 545) ( 937)
7
CABOT MEDICAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands) Six months ended
April 29, April 30,
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1995 1994
------- -------
Net increase (decrease) in cash and
cash equivalents $ ( 328) $ 841
Cash and cash equivalents at beginning of year 2,129 3,452
------- -------
Cash and cash equivalents at end of period $ 1,801 $ 4,293
===== =======
Supplemental disclosures of cashflow information:
Cash paid during the period for:
Interest $ 2,644 $ 2,625
Income taxes $ 29 $ 330
8
CABOT MEDICAL CORPORATION
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
APRIL 29, 1995 AND APRIL 30, 1994
(Unaudited)
Note 1 In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (all of which
were normal recurring accruals) necessary to present fairly the
financial position and results of operations for the interim periods
presented.
The statements of operations for the three months and six months ended
April 29, 1995 and April 30, 1994 are not necessarily indicative of
results for the full year.
While the Company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these
consolidated condensed financial statements be read in conjunction with
the consolidated financial statements and accompanying notes included in
the Company's Annual Report on Form 10K for the fiscal year ended
October 29, 1994.
Note 2 Net earnings (loss) per share computations are based on the weighted
average number of common shares outstanding including common stock
equivalents (stock options and warrants) utilizing the modified treasury
stock method when their effect is dilutive. For the three months and six
months ended April 29, 1995, the effect of the common stock equivalents
on the net earnings (loss) per share computations utilizing the modified
treasury stock method was antidilutive.
Weighted average number of common shares outstanding and net earnings
(loss) per share computations give retroactive recognition to the 2%
stock dividend declared February 2, 1993, the 10% stock dividend
declared June 1, 1993, the 10% stock dividend declared December 6, 1993
and the 10% stock dividend declared April 13, 1994 for all periods
presented.
Shares issuable upon conversion of the Company's 7.50% Convertible
Subordinated Notes due March 1, 1999 are excluded from the per share
computations as they are not common stock equivalents and are
antidilutive.
9
CABOT MEDICAL CORPORATION
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
APRIL 29, 1995 AND APRIL 30, 1994
Note 3 Cash Equivalents are short-term highly liquid investments readily
convertible to known amounts of cash and have original maturities of
three months or less.
Note 4 Short-term investments consist of United States government agency
obligations with an original maturity of greater than three months but
less than one year. Such investments are recorded at amortized cost,
which approximates market value as the Company has the intent and
ability to hold these securities until maturity pursuant to Statement of
Financial Accounting Standards No. 115.
10
CABOT MEDICAL CORPORATION
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Position
- ------------------
Comparison of the quarter ended April 29, 1995 to the fiscal year ended
October 29, 1994.
Cash and cash equivalents decreased by $328,000 or 15% primarily due the funds
utilized for payment of relocation, severance and facility refurbishing expenses
attributable to the Company's human resource and facility rationalization
program and the cross-training and other related expenses incurred in connection
with the integration of the Company's endoscopy and urology sales forces.
Inventory increased $1,633,000 or 13% primarily to support: (i) new specialty
disposables and Urological product introductions; and (ii) the continuing
transition of manufacturing operations to Racine, Wisconsin and the remaining
Langhorne facility during the Company's facilities rationalization program.
Inventory levels should begin to decline once the transition process is
complete.
Prepaid expenses and other current assets increased $351,000 due to the
prepayment of: (i) business insurance premiums and (ii) marketing and
engineering costs.
Other assets, net, decreased $152,000 primarily due to the application of the
short-term advance payments given vendors for goods provided in the current
year.
Accounts payable increased $313,000 or 23% due to the timing differences between
when goods and services are received and when they are paid.
Accrued restructuring decreased by $523,000 primarily due to the payments, in
the second quarter, of costs associated with the Company's human resources and
facility rationalization program and reductions in the restructuring accrual
reflecting changes (savings) realized during the rationalization programs.
Accrued expenses increased $313,000 or 9% primarily due to the increase in
accrued inventory purchases which were received late in the second quarter.
Notes receivable from officers of $297,000 represent loans made to certain
officers of the Company to pay the exercise price due upon their exercise of
Company stock options in late 1994. Such loans are evidenced by promissory notes
that are due on demand, bear interest at the prime rate plus .25% per annum and
are secured by shares of the Company's common stock. Such loans were repaid in
full early in the third quarter of the fiscal year.
11
CABOT MEDICAL CORPORATION
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
---------------------
Comparison of the quarter ended April 29, 1995, to the quarter ended April
30, 1994.
Net sales decreased $686,000 or 4% primarily due to a decrease of $1,529,000 or
10% in domestic sales offset in part by an international sales increase of
$843,000 or 52%.
The domestic sales decrease was primarily attributable to lower prices for
disposable products resulting from price concessions demanded by large buying
groups and from competitive product pricing in the marketplace. The lower prices
for disposable products impacted the Company significantly as product mix has
shifted from capital equipment to disposables. In addition, the lower sales
reflect the shift to lower unit priced disposables from higher unit priced
capital equipment. The Company is attempting to address this effect of the shift
in product mix through the introduction of higher margin specialty disposable
and reusable products. Late in the first quarter of 1995, the Company integrated
its endoscopy and urology sales forces, thus enabling each person in the sales
force to sell both product lines. This resulted in an expected reduction in
productivity of the sales force in the second quarter. The Company expects
productivity to increase as the integrated sales force becomes more proficient
in selling both product lines.
The increase in international sales is primarily due to capital equipment,
urological and disposable sales to the Far East and Government agencies under
programs which are expected to impact the Company cyclically throughout the
remainder of the fiscal year.
Gross Profit decreased as a percentage of sales from 64% to 56% primarily due to
the impact of the lower prices and the shift in product mix described above. In
addition, the Company is absorbing the costs of excess production capacity
(Langhorne, Pennsylvania), which should be reduced when the Company completes
its facility rationalization program in the third quarter.
Selling and administrative expenses decreased by $37,000 (increased as
percentage of sales to 39% from 38%). Sales and marketing expenses increased by
$217,000 primarily due to expenses related to the training and other related
expenses associated with the integration of the Company's endoscopy and urology
sales forces initiated during the first quarter of the current year.
Administrative expenses decreased approximately $254,000 primarily due to a
reduction of administrative operating costs resulting from the Company's human
resource rationalization program.
12
CABOT MEDICAL CORPORATION
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Research and development expenses decreased $126,000 due to the reduction in the
departmental operating costs as redundant positions were eliminated when the
research and development functions were consolidated into one facility
(Langhorne, Pennsylvania). In addition, specialty disposables and reusable
instrument product lines do not require as high a level of product development
and support as capital equipment product lines.
The restructuring credit of $48,000 reflects the adjustments to the
restructuring reserve to account for further changes (savings) in relocation
expenses attributable to the Company's previously announced facility and human
resource rationalization programs. These savings were due primarily to the
Company's having fewer employees relocate than originally planned due to
voluntary resignations.
The reduction in income tax expense of $253,000 resulted primarily from the
generation of a net operating loss in the second quarter offset, in part, by
state income tax expense.
Results of Operations
- ---------------------
Comparison of the six months ended April 29, 1995 to the six months ended
April 30, 1994.
Net sales decreased $1,669,000 or 5% primarily due to a decrease of $2,239,000
or 7% in domestic sales offset, in part by an International sales increase of
$570,000 or 17%.
The domestic sales decrease was primarily attributable to lower prices for
disposable products resulting from price concessions demanded by large buying
groups and from competitive product pricing in the marketplace. The lower prices
for disposable products impacted the Company significantly as product mix has
shifted from capital equipment to disposables. In addition, the lower sales
reflect the shift to lower unit priced disposables from higher unit priced
capital equipment. The Company is attempting to address this effect of the shift
in product mix through the introduction of higher margin specialty disposable
and reusable products. Late in the first quarter of 1995, the Company integrated
its endoscopy and urology sales forces, thus enabling each person in the sales
force to sell both product lines. This resulted in an expected reduction in the
productivity of the sales force in the second quarter. The Company expects
productivity to increase as the integrated sales force becomes more proficient
in selling both product lines.
13
CABOT MEDICAL CORPORATION
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Gross Profit decreased as a percentage of sales from 63% to 58% primarily due to
the impact of lower prices and the shift in product mix described above. In
addition, the Company is absorbing the costs of excess production capacity
(Langhorne, Pennsylvania), which should be reduced when the Company completes
its facility rationalization program in the third quarter.
Selling and administrative expenses increased by $344,000 from 37% to 40% of
sales. Sales and marketing expenses increased by $1,109,000 primarily due to
expenses related to the training and other related expenses associated with the
integration of the Company's endoscopy and urology sales forces initiated during
the first quarter of the current year. Administrative expenses decreased
approximately $764,000 primarily due to a reduction of administrative operating
costs resulting from the Company's human resource rationalization program and a
reduction in bad debt expense resulting from the Company's belief that the
overall reserve for bad debt is adequate for future needs.
Research and development expenses decreased $480,000 due to the reduction in the
departmental operating costs as redundant positions were eliminated when the
research and development functions were consolidated into one facility
(Langhorne, Pennsylvania). In addition, specialty disposables and reusable
instrument product lines do not require as high a level of product development
and support as capital equipment product lines.
The restructuring credit of $188,000 reflects adjustments made for changes
(savings) in relocation, severance, facility refurbishing and carrying costs
associated with the Company's previously announced facility and human resource
rationalization programs. These savings were due primarily to higher than
expected voluntary resignations, lower actual refurbishing costs and a reduced
need for transitional equipment costs.
Other income increased $112,000 reflecting the net proceeds from the sale of an
intangible asset.
The reduction in income tax expense of $261,000 resulted primarily from lower
taxable earnings in fiscal 1995 than in fiscal 1994. The federal effective tax
rate of 24% in fiscal 1995 as compared to 14% in fiscal 1994 reflects a higher
level of utilization of federal net operating loss carryforwards than in fiscal
1994.
14
CABOT MEDICAL CORPORATION
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
There are no existing material commitments for capital expenditures nor are any
anticipated in the foreseeable future. If material unanticipated capital
expenditures are required, the Company believes it has adequate credit lines
available to meet such needs. The Company believes it has sufficient cash
resources from operations and available credit lines to meet foreseeable cash
needs. The Company presently has $16,638,000 available on all bank credit lines,
after contingent liabilities for guarantees of currently issued letters of
credit.
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------------------
The Annual Meeting of Shareholders of Cabot Medical Corporation was held on
April 21, 1995, for the purpose of electing a board of directors, approving the
appointment of independent auditors, and voting on the proposals described
below. Proxies for the meeting were solicited pursuant to Section 14(a) of the
Securities Exchange Act of 1934 and there was no solicitation in opposition of
the management's solicitations. All of the management's nominees for directors
as listed in the proxy statement were elected and the appointment of the
independent auditors was ratified.
The following votes were cast for the individuals set forth below:
SHARES SHARES SHARES
VOTED VOTED VOTED
NAME "FOR" "AGAINST" "ABSTAINING"
---- ------- --------- ------------
Warren G. Wood 7,490,751 126,911 0
Harry Brener 7,491,159 126,503 0
Marvin B. Sharfstein 7,484,092 133,570 0
Eugene V. Howard 7,483,715 133,947 0
Harvey W. Grossman 7,491,026 126,636 0
In addition at such meeting Shareholders voted on the following proposal:
1. Proposal to increase the number of shares of common stock issuable under
the Company's Independent Directors' Non-Qualified Stock Option Plan (the
"Plan") by 60,000 shares.
SHARES SHARES SHARES
VOTED VOTED VOTED
"FOR" "AGAINST" "ABSTAINING"
------- --------- ------------
6,689,199 849,434 76,838
15
CABOT MEDICAL CORPORATION
PART II. OTHER INFORMATION
----------------------------
Item 6: Exhibits and Reports on Form 8-K
- --------------------------------------------
(a) Exhibits:
Exhibit 11 Statement Re Statement of Per Share
Earnings
(b) Reports on Form 8-K:
On April 28, 1995, the Company filed a report
on Form 8-K reporting that on April 24, 1995,
the Company executed an Agreement and Plan of
Reorganization with Circon Corporation.
16
CABOT MEDICAL CORPORATION
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 duly authorized.
CABOT MEDICAL CORPORATION
Date:_________________ /S/ Warren G. Wood
------------------------------------------
Warren G. Wood, President, Chairman of
the Board of Directors
and Chief Executive Officer
Date:_________________ /S/ Marvin Sharfstein
------------------------------------------
Marvin Sharfstein, Treasurer and Vice
President of
Corporate Development
17