FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR QUARTER JUNE 30, 19COMMISSION 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 Ootstanding at June 30, 1996: 12,590,504
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND JUNE 30, 1996
ASSETS
(In thousands, except for share amounts)
(UNAUDITED) (UNAUDITED)
December 31, June 30
1995 1996
--------- ----------
CURRENT ASSETS:
Cash and temporary cash investments $ 17,586 $ 8,722
Marketable securities 6,496 1,612
Accounts receivable, net of allowance of
$1,807 in 1995 and $1,833 in 1996 26,539 26,135
Inventories 31,645 34,585
Prepaid expenses and other assets 2,627 3,019
Deferred income taxes 5,932 6,494
--------- -----------
Total 90,825 80,567
PROPERTY, PLANT AND EQUIPMENT NET, 53,750 53,583
OTHER ASSETS 36,824 35,203
--------- -------
Total assets $ 181,399 $ 169,353
========= ========
The accompanying notes are an integral part of
these consolidated balance sheets.
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND JUNE 30, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands,except for share amounts)
(UNAUDITED) (UNAUDITED)
December 31, June 30,
1995 1996
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 15,857 $ 574
Accounts payable 7,728 6,534
Accrued liabilities 10,796 11,429
Customer deposits 1,079 1,384
-------- --------
Total current liabilities 35,460 19,921
NONCURRENT LIABILITIES:
Long - term obligations 56,435 58,935
Deferred income taxes 2,251 546
Capital lease obligations and other 81 41
-------- -------
Total noncurrent liabilities 58,767 59,522
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 12,590,issued and outstanding
in 1995 and 1996 respectively 126 126
Additional paid-in capital 94,928 95,194
Minimum pension liability (143) (143)
Cumulative translation adjustment (513) (405)
Accumulated Deficit (7,226) (4,862)
--------- ---------
Total shareholders' equity 87,172 89,910
Total liabilities and shareholders'
equity $ 181,399 $ 169,353
========= =========
The accompanying notes are an integral part of
these consolidated balance sheets.
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
Three months ended Six months ended
June 30, June 30,
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
1995 1996 1995 1996
---------- --------- --------- ----------
NET SALES $ 41,833 37,062 $ 79,754 $77,024
Cost of sales 19,354 16,466 36,752 34,230
--------- --------- ---------- ----------
GROSS PROFIT 22,479 20,596 43,002 42,794
OPERATING EXPENSES:
Research and development 2,954 3,060 5,566 6,035
Selling, general and administrtion 17,264 16,573 33,112 32,218
Facilities shutdown expense (see note 1) - 2,129 - 2,129
-------- -------- ------ -------
Total operati 20,218 21,762 38,678 40,382
INCOME (LOSS) FROM OPERATIONS 2,261 (1,166) 4,324 2,412
Interest income 312 166 675 261
Interest expense (1,430) (1,002) (2,870) (2,130)
Other income (expense), net (44) (53) 9 (115)
-------- --------- --------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 1,099 (2,055) 2,138 428
Provision (benefit) for income taxes 754 (760) 1,172 64
Non-recurring tax benefit (see note 2) - (2,000) - (2,000)
--------- ----------- --------- --------
NET INCOME $ 345 705 $ 966 2,364
========= ========== ========= ========
EARNINGS PER SHARE $ 0.03 0.05 $ 0.08 0.18
======== ========= ========= ========
Weighted Average Number of Shares of Common
Stock and Equivalent Outstanding 13,074 13,037 12,926 13,078
-------- -------- ---------- --------
The accompanying notes are an integral part of
these consolidated statements.
</TABLE>
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June, 30
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES 1995 1996
-------- -------
Net income $ 966 $ 2,364
Adjustments to reconcile net
income to cash provided by
operating activities:
Depreciation and amortization 5,266 4,961
Deferred income taxes (102) (2,314)
Change in assets and liabilities:
Accounts receivable (1,374) 404
Inventories (3,683) (2,940)
Pepaid expenses and other assets (52) (392)
Other assets 734 211
Accounts payable 1,029 (1,194)
Accrued liabilities (1,136) 633
Customer deposits 29 305
-------- --------
Net cash provided by operating activities 1,677 2,038
-------- --------
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June,
(In Thousands)
CASH FLOWS FROM INVESTING ACTIVITIES 1995 1996
--------- -------
Disposals of marketable securities, net 656 4,884
Purchases of property, plant and equipment (4,941) (3,337)
Cumulative translation adjustment 112 108
--------- --------
Net cash provided by (used in) investing activities (4,173) 1,655
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 375 151
Repayments of capital lease obligations (174) (40)
Repayments of long-term obligations (467) (12,783)
Tax benefit from exercise of stock options 244 115
Other 522 0
--------- --------
Net cash provided by (used in) financing activities 500 (12,557)
Net decrease in cash and temporary
cash investments (1,996) (8,864)
Cash and temporary cash investments, beginning
of period (reflects Cabot cash as of December 31, 1995) 2,882 17,586
-------- -------
Cash and temporary cash investments, end of period $ 886 $ 8,722
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 2,693 $ 976
======== ========
Cash paid for income taxes $ 542 $ 409
======== ========
The accompanying notes are an integral
these consolidated statements.
CIRCON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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) Facilities Closure
------------------
During the second quarter, the company announced the planned
closure of the Langhorne, Pennsylvania facility. The closure is expected to be
completed by the end of 1996 and will result in reduced future operating costs
through human resource and facility rationalization. In connection with this
plan, the company recorded pre-tax charge of $2,129,000 consisting of
(1) $1,674,000 of employee severance, relocation and out-placement costs
and (2) $455,000 of cancellation of operating leases, relocation of product
and equipment and other facility closure related costs.
(2) Taxes
-----
During the second quarter, Cabot Medical was liquidated and merged
into Circon. Prior to the merger, the Cabot net operating loss carryforwards
(nols) had a valuation allowance since historical data did not support current
recognition of the loss carryforwards. The liquidation increases Circon's
ability to utilize these nols and the Company recognized a non-recurring
tax benefit by reducing the valuation allowance by $2 million.
(3) 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 June 30, 1996 consist of the
following:
1995 1996
------ -------
Raw materials $ 11,017 $ 11,474
Work in process 12,243 13,252
Finished goods 8,385 9,859
------- --------
$ 31,645 $ 34,585
======== ========
(4) Long-Term Obligations
---------------------
Long-term obligations as of December 31, 1995 and
June 30, 1996 consisfollowing:
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
June 30, 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 million 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 million as of June 30, 1996.
During the first quarter of 1996 the Company repurchased all but
$39,000 of the $67,000,000 convertible notes. In April 1996 the Company
repurchased the remaining $39,000 of the convertible note. $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 long term obligation 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 Conditons
RESULTS OF OPERATIONS
Three Months Ended June 30, 1996
Compared to Three Months Ended June 30, 1995
Sales
Second quarter sales totaled $37.1 million compared to $41.8 million
for the same 1995 quarter. Second quarter sales were affected by a
combination of uneven performance by the U.S. sales force and slow sales
by European international dealers. Sales management's attention is focused
on improving the performance level of the lowest one third of the U.S. sales
force. Second quarter 1995 sales reflected the introduction of the
VaporTrode vaporizing electrode and related products. Price increases
had no impact on the quarter's sales.
Gross Profit
Gross profit for the quarter totaled $20.6 million compared to $22.5
million for the second quater 1995. Gross profit percentage for quarter
was 55.6%, up from 53.7% for the same 1995 period. The improvement was
the result of increased manufacturing efficiencies and sales of higher margin
products.
Operating Expenses
In May 1996, Circon announced that it was closing Cabot Medical's
facility in Langhorne, Pennsylvania, and taking other consolidation actions
by the end of the third quater. A one-time charge of $2.1 million
associated with the closing is included in the second quarter results.
Operating expenses for the quarter, excluding the $2.1 million charge
for the Langhorne facility shutdown, totaled $19.6 million, down 3% from the
second quarter 1995. Research and development expenditures totaled $3.1
million, up 4% over the same 1995 period reflecting continuing emphasis on
new product development. As a percent of sales, R&D expense was 8.3%
compared to 7.1% for the prior period. Selling, general and administrative
expenses totaled $16.6 million, down 4% reflecting economies gained from
the merger of Circon and Cabot.
In 1997 and subsequent years, Circon's manufacturing costs and
operating expenses are targeted to be reduced by $3.7 million each year as
a result of closing the Langhorne facility. Cabot's marketing and
administrative functions will be consolidated with existing Circon functions
and the products manufactured in Langhorne will be transferred to other
Circon specialized manufacturing facilities.
The process of closing the facility and transferring the production to
other manufacturing sites began in May and is targeted to be completed by
the end of October 1996.
Income from Operations
Operating income totaled $1.0 million, excluding one-time charges,
compared to $2.3 million for the second quarter 1995, due to lower sales
and the gross profit and operating expense trends discussed above.
Interest and Other Expense
Net interest expense was $0.8 million compared to $1.1 million for
the second quarter 1995, due to reduced loan balance.
Income Taxes
The provision for income taxes for the second quarter 1996 reflected
a $0.8 million benefit or 37% of the pretax loss. A $2.0 million non-recurring
net operating loss carryforward benefit was recorded in the quarter as a
result of Cabot Medical being liquidated and merged into Circon (see
footnote 2 - Taxes)
Net Income
Net income totaled $0.7 million or $0.05 per share compared to
$0.3 million or $0.03 per share due to the factors discussed above.
Sales Enhancement and Cost Reduction Measures
The Company is implementing various measures designed to enhance sales and
reduce costs, and plans to implement additional such measures during the
balance of 1996 and 1997. The Company expects that the primary impact of these
measures will not occur before 1997. Although the Company believes that
successful implementation of these measures should have a significant favorable
effect on net income in future periods, there can be no assurance regarding
successful implementation of the timing or magnitude of the benefits.
Six Months Ended June 30, 1996
Compared to Six Months Ended June 30, 1995
Sales
First half sales totaled $77.0 million compared to $79.8 million
for the same 1995 period. Sales by the U.S. sales force were $58.2 million
and international sales totaled $12.4 million, both down from the
comparable 1995 period. Industrial sales were up 5.9% and other domestic
sales declined 10.9% for the first half 1996 compared to the same period
in 1995.
Price increases between the first half of 1996 and 1995 have been
negligible.
Gross Profit
Gross profit for the first half of 1996 totaled $42.8 million compared
to $43.0 million in 1995. Gross profit as a percentage of sales for the first
half was 55.6% of sales, up from 53.9% for the same 1995 period. The
improvement was the result of increased manufacturing efficiencies and
sales of higher margin products.
Operating Expenses
The one-time facility closure expense of $2.1 discussed in the
second quarter to second quarter comparison has been excluded in the
comparisons of first half operating results.
Total operating expenses for the first half were $38.3 million, down
1% from the same 1995 period. R&D expenditures totaled $6.0 million,
up 8% over the comparable 1995 period, and were 7.8% of sales.
Selling, general and administrative expenses were $32.2 million,
down 3%, reflecting economies gained from the merger of Circon and
Cabot.
Operating Income
Operating income for the first half 1996 totaled $4.6 million
compared to $4.3 million in 1995. The higher gross profit percentage
and reduced operating expenses were the primary factors in the improved
operating performance.
Interest and Other Income
Interest expense of $2.1 million decreased $0.7 million from the first
half 1995 due to reduced debt. Interest income decreased $0.4 million from
prior year due to lower investment balances.
Income Taxes
The provision for income taxes for the first half 1996, excluding the
$2.0 million non-recurring tax benefit, is down $1.1 million. See the
discussion in the second quarter to second quarter comparison and
footnote 2.
Net Income
Net income totaled $2.4 million for the first half 1996 compared
to $1.0 million for the same 1995 period, due to the factors discussed
above.
Liquidity and Capital Resources
Circon has a $75.0 million secured revolving credit line with a
syndicate of banks. $50.5 million of the facility was used to repurchase
Cabot notes in January 1996 (see note 2).
As of June 30, 1996, the company had cash and marketable
securities totaling $8.7 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.
Forward Looking Statements
See Item 5 regarding the forward looking statements in this Item 2 and
certain important cautionary statements.
PART II
Item 1. Legal Proceedings.
On May 28, 1996, two purported stockholders of the Company, Bart
Milano and Elizabeth Heaven, commenced an action in the Superior Court
of the State of California for the County of Santa Barbara, Case No. 213476,
purportedly on behalf of themselves and all others who purchased the
Company's common stock between May 2, 1995 and February 1, 1996,
against the Company, Richard A. Auhll, Rudolf R. Schulte, Harold R. Frank,
John F. Blokker, Paul W. Hartloff, Jr., R. Bruce Thompson, Jon D. St. Clair,
Frederick A. Miller, David P. Zielinski, Winton L. Berci, Jurgen Zobel, Trevor
Murdoch, and Warren G. Wood. The complaint alleges that the defendants
violated Sections 11 and 15 of the Federal Securities Act of 1933, as
amended, Sections 25400-02 and 25500-02 of the California Corporations
Code, and Sections 1709-10 of the California Civil Code, by disseminating
allegedly false and misleading statements relating to Circon's acquisition
of Cabot Medical Corp. by merger. In general the complaint alleges that
defendants knew that synergies from the merger would not be achieved,
but misrepresented to the public that they would be achieved, in order to
obtain approval for the merger so they would be executives of a much
larger corporation. This alleged conduct allegedly had the effect of inflating
the Company's stock price. The complaint seeks compensatory and/or
punitive damages, attorney fees and costs, and any other relief (including
injunctive relief) deemed proper.
On July 29, 1996, defendants filed demurrers to the complaint on the
ground that plaintiffs' allegations failed to state facts sufficient to
constitute a cause of action. On or about August 6, 1996, plaintiffs served
their Response to defendants' demurrers, stating their intention to file an
amended complaint prior to the hearing on defendants' demurrers. The Company
believes plaintiffs' allegations to be without merit and intends to defend the
lawsuit vigorously.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders was held on July 12, 1996.
The following table shows voting information for each item voted upon:
Proposal Voting Tabulation
- - ------------ ---------------------
Election of
Directors
Nominees For Against
---- -------
John F.
Blokker and
Harold R.
Frank 10,279,078 78,172
For Against Abstain
---- -------- ---------
Ratificatioof
Section of
Accountants 10,231,791 97,456 28,003
The total number of shares of Circon Corporation Common Stock
outstanding as of May 13, 1996, the record date for the Annual Meeting,
was 12,588,677.
Item 5. Other Information.
(a) On August 2, 1996, USS Acquisition Corp. (the "Purchaser"),
Delaware corporation and wholly-owned subsidiary of United States
Surgical Corporation, a Delaware corporation, filed with the Securities and
Exchange Commission a tender offer statement on Schedule 14D-1 which
disclosed that Purchaser has offered to purchase all issued and all
outstanding shares of the Company at a price of $18.00 per share, net to
the seller in cash without interest thereon, upon the terms and subject to
the conditions set forth in the Purchaser's offer to purchase and related
letter of transmittal. On August 5, 1996, Circon issued a press release
indicating that the Circon Board of Directors is consulting with its legal
and financial advisors and that the Board would respond to the unsolicited
offer in due course.
(b) The Private Securities Litigation Reform Act of 1995 provides
a "safe harbor" for forward-looking statements. Except for the historical
information contained in this filing, the matters discussed herein are
forward-looking statements. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause
the actual results, performance, cost savings or achievements of the
Company, or industry results, to be materially different from any future
results, performance, cost savings or achievements expressed or implied
by such forward-looking statements. Such factors include, among others
those set forth below under the heading "Additional Cautionary
Statements" and the inability of the Company to achieve the reduction in
manufacturing and operating expenses that it has targeted as a result of
the closing of the Langhorne facility.
ADDITIONAL CAUTIONARY STATEMENTS
No assurance of Synergies or Cost Savings from Integration of
Operations. Circon acquired Cabot Medical Corporation ("Cabot") by
merger (the "Merger") in August, 1995 with the expectation that the Merger
will result in beneficial synergies and cost savings for the combined
Company. Achieving the anticipated benefits of the Merger depends in
part upon integration of the two companies' respective product offerings
and of their sales and marketing and research and development efforts.
There can be no assurance that integration will be accomplished
successfully or achieve the expected synergies. Following the Merger,
the Company has to train the former Cabot sales force to sell the
medical devices carried by Circon. This training has required time out of
the field and has adversely affected sales and increased selling expenses.
The productivity of the combined U.S. Direct sales force has been below
expectations. Although some sales personnel have produced significantly
increased sales, others have experienced significantly lower sales
productivity. There can be no assurance that current efforts to improve
the productivity of the direct sales force will be sucessful. The process
of integration, including the closure of the Langhorne facility, involves
organization changes or shifts in employee responsibilities, as well as other
factors, that could result in the loss of the services of qualified employees,
some of whom might be difficult to replace. The transfer of products
previously manufactured in Langhorne to other facilities may lead to
additional costs and expenses that are currently not anticipated. Failure
to effectively accomplish the integration of the two companies' operations
could have a material adverse effect on Circon's results of operations and
financial condition.
Volatility of Stock Price. The market price of Circon's Common Stock
is highly volatile and has ranged from a high of $20.25 to a low of $8.75 in
1996. The future market price of Circon's Common Stock could be subject
to wide fluctuations in response to such factors as substantial variations in
quarterly financial results, announcements of technological innovations or
new products by Circon or its competitors, changes in prices of Circon's or
its competitors' products and services, changes in product mix, changes in
Circon's revenue and revenue growth rates for Circon as a whole or for
individual geographic areas, business units, products or product categories,
as well as other events or factors. Statements or changes in opinions,
ratings, revenue or earnings estimates made by brokerage firms or industry
analysts relating to the markets in which Circon does business or relating
to Circon specifically have resulted, and could in the future result, in an
immediate and adverse effect on the market price of Circon's Common
Stock. Also, failure to achieve revenue, earnings and other operating and
financial results as forecasted or anticipated could result in an immediate
and adverse effect on the market price of Circon Common Stock.
In addition, the stock market has from time to time experienced extreme
price and volume fluctuations which have particularly affected the market
price for the securities of many medical products companies and which often
have been unrelated to the operating performance of these companies.
These market fluctuations may adversely affect the market price of Circon
Common Stock.
Increasing Competition and Risk of Obsolescence from Technological Advances.
The markets in which Circon's products compete are characterized by
continuing technical innovation and increasing competition.
Some surgical procedures which utilize the Company's products could
potentially be replaced or reduced in importance by alternative medical
procedures or new drugs. To the extent that any of the alternative
procedures or drugs significantly reduces the need for Circon products,
a substantial portion of the Company's current business could be
adversely affected.
Government Regulation. The manufacture and marketing of
medical products are subject to extensive and rigorous federal and
state regulation in the United States and to various regulatory
requirements in other countries. The process of obtaining and maintaining
required regulatory approvals is lengthy, expensive and uncertain.
Although Circon has not experienced any substantial regulatory delays to
date, there is no assurance that delays will not occur in the future, which
could have a significant adverse effect on Circon's ability to introduce
new products on a timely basis. Regulatory agencies periodically inspect
Circon's manufacturing facilities to ascertain compliance with "good
manufacturing practices" and can subject approved products to additional
testing and surveillance programs. Failure to comply with applicable
regulatory requirements can, among other things, result in fines,
suspensions of regulatory approvals, product recalls, operating
restrictions and criminal penalties. If Circon experiences a delay
in obtaining governmental approval or fails to comply with regulatory
requirements, it could have an adverse effect on Circon's results of
operations and financial condition.
Uncertainties within the Healthcare Markets. Political, economic
and regulatory influences are subjecting the healthcare industry in the
United States to rapid, continuing and fundamental change. Although
Congress has failed to pass comprehensive health care reform legislation
to date, Circon anticipates that Congress, state legislatures and the private
sector will continue to review and assess alternative health care delivery
and payment systems. Potential approaches that have been considered
include mandated basic health care benefits, controls on health care
spending through limitations on the growth of private health insurance
premiums and Medicare and Medicaid spending, the creation of large
insurance purchasing groups, price controls and other fundamental
changes to the health care delivery system. Legislative debate is
expected to continue in the future. In addition, responding to increased
costs and to pressure from the government and from insurance companies
to reduce patient charges, healthcare providers (including customers of
Circon) have demanded, and in many cases received, reduced prices on
medical devices. These customers are expected to continue to demand
lower prices in the future. Circon cannot predict what impact the adoption
of any federal or state health care reform measures, private sector reform
or market forces may have on its business. However, pricing pressure is
expected to continue to adversely affect profit margins.
Product Liability Risk. Circon's products involve a risk of product
liability. Although Circon maintain product liability insurance at coverage
levels which they believe are adequate, there is no assurance that, if the
Company were to incur substantial liability for product liability claims,
insurance would provide adequate coverage against such liability.
Effect of Antitakeover Provisions of Delaware Law and Circon's
Charter Documents. Circon is subject to the provisions of Section 203
of the Delaware General Corporation Law, which has the effect of
restricting changes in control of a company. Moreover, the following
provisions of Circon's certificate of incorporation and bylaws could, in
some circumstances, impede a change of control of Circon: (i) the
classification of the Board of Directors into three groups serving staggered
three-year terms, so that a majority of the directors is not elected at any
annual meeting; (ii) a provision that stockholders can take action only at
a stockholders meeting (and not be written consent) and a provision that
only the Board of Directors can call a special meeting of stockholders;
(iii) a requirement that stockholders provide advance notice to Circon of
any stockholder proposal to be brought before a stockholder meeting or
any intention to cumulate votes in the election of directors; (iv) a
requirement that stockholder action to amend the provision in clause
(ii) or (iii) or to amend any bylaw be adopted by holders of two-thirds of
the outstanding voting shares. In addition, Circon's Board of Directors
has the authority to issue up a 5,000,000 shares of preferred stock and
to fix the rights, preferences, privileges and restrictions, including voting
rights, of such shares without any further vote or action by the
stockholders. These and other provisions of Delaware Law applicable to
Circon and Circon's charter documents may have the effect of delaying,
deterring or preventing changes in control or management of Circon.
Disruptive Effect of Hostile Tender Offer. On August 2, 1996, a
subsidiary of United States Surgical Corporation initiated an unsolicited
offer to purchase all outstanding shares of the Company's Common Stock.
This tender offer could have various adverse affects on the Company's
business and results of operations, including the increased susceptibility
of key employees of the Company to employment offers by other
companies, the risk of negative reactions among distributors, suppliers or
customers to the prospect of such a change in control of the Company,
and the fees and other expenses of financial, legal and other advisors to
the Company in responding to the tender offer.
Item 6. Exhibits and Reports on Form 8K.
(a) Exhibit Index
3.1B. Certificate of Amendment of Certificate of Incorporation
of Circon Corporation merging Cabot Medical Corporation in
Circon Corporation.
3.1C. Certificate of Amendment of Certificate of Incorporation
of Circon Corporation providing that no action required or
permitted to be taken at a meeting of the shareholders may
taken without a meeting or by written consent.
(b) The Company filed no reports on Form 8-K in the Second
Quarter of 1996 with the Securities and Exchange Commission
Exhibit 3.1B
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
CABOT MEDICAL CORPORATION
INTO
CIRCON CORPORATION
Circon Corporation, a corporation organized an existing under the
laws of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That Circon Corporation was incorporated on April 23, 1987,
pursuant to the laws of the State of Delaware.
SECOND: That Circon Corporation owns all of the outstanding
shares of the stock of Cabot Medical Corporation, a corporation incorporated
on April 8, 1983, pursuant to the laws of the State of New Jersey.
THIRD: That Circon Corporation, by the following resolutions of its
Board of Directors (the "Board"), duly adopted by the unanimous written
consent of its members, filed with the minutes of the Board, on
March 25, 1996, determined to and did merge into itself said Cabot
Medical Corporation:
Resolved: That Cabot Medical Corporation, a New Jersey corporation
("Cabot"), all of the outstanding shares of each class of which are owned by
the Company, be merged into the Company (the "Merger") pursuant to
applicable provisions of the New Jersey Business Corporation Act and of
the Delaware General Corporation Law.
Resolved Further: That the officers of Cabot and the officers of the
Company are authorized and directed to do all acts and to execute, verify
and file all documents necessary to effectuate the merger pursuant to
applicable provisions of the New Jersey Business Corporation Act and of
the Delaware General Corporation Law.
IN WITNESS WHEREOF, Circon Corporation has caused this
Certificate of Merger to be signed by itself or a duly authorized officer as
of this 28th day of June 1996.
CIRCON CORPORATION
By:\s\ Richard A. Auhll
Name: Richard A. Auhll
Title: President, Chairman of the Board
Exhibit 3.1C
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
CIRCON CORPORATION
CIRCON CORPORATION, a corporation organized and existing
under and by virtue of the General Corporation Law of the State of
Delaware (the "General Corporation Law"), does hereby certify:
1. That the following new Article TWELFTH of the corporation's
Certificate of Incorporation has been duly adopted by the board of
directors in accordance with the provisions of Section 242 of the General
Corporation Law:
"TWELFTH: No action required or permitted to be taken at
any annual or special meeting of the shareholders may by taken without
a meeting and the power of the stockholders to consent in writing,
without a meeting, to the taking of any action is specifically denied."
2. That the foregoing amendment has been duly approved by the
stockholders in accordance with the provision of Section 242 of the General
Corporation Law.
IN WITNESS WHEREOF, CIRCON CORPORATION has caused this
Certificate of Amendment of Certificate of Incorporation to be signed by
Richard A. Auhll, its President and Chairman of the Board, and
Daniel J. Meaney, Jr., its Secretary, this 27th day of March, 1996.
\s\ Richard A. Auhll
RICHARD A. AUHLL
President and Chairman of the Board
ATTEST: \s\ Daniel J. Meaney, Jr.
DANIEL J. MEANEY, JR.
Secretary
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 14, 1996
Date RICHARD A. AUHLL
President
Chief Executive Officer
August 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] 6-MOS
<FICAL-YEAR-END> DEC-31-1996
[PERIOD-END] JUNE-30-1996
[CASH] 8,722,000
[SECURITIES] 1,612,000
[RECEIVABLES] 27,968,000
[ALLOWANCES] 1,833,000
[INVENTORY] 34,585,000
[CURRENT-ASSETS] 80,567,000
[PP&E] 89,285,000
[DEPRECIATION] 35,702,000
[TOTAL-ASSETS] 169,353,000
[CURRENT-LIABILITIES] 19,921,000
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 95,320,000
[OTHER-SE] (548,000)
[TOTAL-LIABILITY-AND-EQUITY] 169,353,000
[SALES] 77,024,000
[TOTAL-REVENUES] 77,024,000
[CGS] 34,230,000
[TOTAL-COSTS] 34,230,000
[OTHER-EXPENSES] 40,382,000
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 2,130,000
[INCOME-PRETAX] 428,000
[INCOME-TAX] (1,936,000)
[INCOME-CONTINUING] 2,364,000
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 2,364,000
[EPS-PRIMARY] .18
[EPS-DILUTED] .18
</TABLE>
