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 June 30, 1997 COMMISSION FILE NO. 0-12025
CIRCON CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-3079904
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6500 Hollister Avenue, Santa Barbara, California 93117-3019
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number,
including area code: (805) 685-5100
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter
period that the registrant was required to file such
reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of Common Shares Outstanding at
June 30, 1997: 13,246,783
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND JUNE 30,1997
ASSETS
(In thousands, except for share amounts)
(UNAUDITED)
December 31, June 30,
1996 1997
-------- ---------
CURRENT ASSETS:
Cash and temporary cash investm $ 6,234 $ 1,154
Marketable securities 1,074 1,112
Accounts receivable, net of allowance of
$1,644 in 1996 and $1,499 in 1997 28,497 33,978
Inventories 35,123 40,340
Prepaid expenses and other assets 1,939 2,012
Deferred income taxes 8,046 8,046
--------- -------
Total current assets 80,913 86,642
--------- -------
DEFERRED INCOME TAXES 831 831
PROPERTY, PLANT, AND EQUIPMENT, NET 53,841 54,058
OTHER ASSETS, at cost net of accumulated amortization 33,533 32,003
--------- --------
Total assets $ 169,118 $ 173,534
========= ========
The accompanying notes are an integral part of
these consolidated balance sheets.
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND JUNE 30,1997
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands, except for share amounts)
(UNAUDITED)
December 31, June 30,
1996 1997
-------- ---------
CURRENT LIABILITIES:
Current maturities of long-term $ 429 $ 370
Accounts payable 6,344 5,728
Accrued liabilities 12,000 10,873
Customer deposits 879 1,084
--------- ----------
Total current liabilities 19,652 18,055
---------- ----------
NONCURRENT LIABILITIES:
Long-term obligations 50,565 56,065
---------- -----------
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
13,239,746 and 13,246,783 issued and outstanding
in 1996 and 1997, respectively 132 132
Additional paid-in capital 104,426 104,484
Cumulative translation adjustment (502) (1,278)
Accumulated deficit (5,155) (3,924)
--------- ---------
Total shareholders' equity 98,901 99,414
--------- ---------
Total liabilities and shareholders'
equity $ 169,118 $ 173,534
========= =========
The accompanying notes are an integral part of
these consolidated balance sheets.
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, And Six Months Ended June 30,
(In thousands, except per share amounts)
<TABLE>
<S> <C> <C> <C> <C>
Three months ended Six momths ended
June 30, June 30,
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
1996 1997 1996 1997
-------- ------- --------- --------
NET SALES $ 37,062 $ 40,455 $ 77,024 $ 78,848
Cost of sales 16,466 18,673 34,230 35,600
------- -------- --------- ---------
GROSS PROFIT 20,596 21,782 42,794 43,248
OPERATING EXPENSES:
Research and development 3,060 2,743 6,035 5,527
Selling, general and administrative 16,573 17,517 32,218 34,196
Facilities shutdown expense (see note 2 ) 2,129 - 2,129 -
-------- ------- -------- --------
Total operating expenses 21,762 20,260 40,382 39,723
INCOME (LOSS) FROM OPERATIONS (1,166) 1,522 2,412 3,525
Interest income 166 40 261 181
Interest expense (1,002) (1,000) (2,130) (1,919)
Other expense, net (53) 115 (115) 106
-------- ------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (2,055) 677 428 1,893
Provision (benifit) for income taxes (760) 237 64 662
Non-recurring tax benifit (see note 3 ) (2,000) - (2,000) -
-------- -------- -------- --------
NET INCOME $ 705 $ 440 $ 2,364 $ 1,231
======== ======== ========= =========
EARNINGS PER SHARE: $ 0.05 $ 0.03 $ 0.18 $ $ 0.09
======== ======== ========= =========
Weighted Average Number of Shares of Common
Stock and Equivalents Outstanding 13,037 13,572 13,078 13,620
-------- -------- ---------- ---------
The accompanying notes are an integral part of
these consolidated statements.
</TABLE>
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Six Months Ended June 30,
(In thousands)
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1997
-------- --------
Net income $ 2,364 $ 1,231
Adjustments to reconcile net
income to cash provided by (used in)
operating activities:
Depreciation and amortization 4,961 4,272
Deferred income taxes (2,314) -
Change in assets and liabilities:
Accounts receivable 404 (5,481)
Inventories (2,940) (5,217)
Prepaid expenses and other assets (392) (73)
Other assets 211 161
Accounts payable (1,194) (616)
Accrued liabilities 633 (1,186)
Customer deposits 305 205
--------- ---------
Net cash provided by (used in) operating $ 2,038 $ (6,704)
--------- ---------
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Six Months Ended June 30,
(In thousands)
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM INVESTING ACTIVITIES 1996 1997
-------- --------
Disposals of marketable securities, $ 4,884 $ -
Purchase of marketable securities - (38)
Purchases of property, plant and equipment (3,337) (2,954)
Purchase of intangible - (166)
Cumulative translation adjustment 108 (776)
-------- --------
Net cash provided by (used in) investing activities 1,655 (3,934)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 151 58
Repayments of capital lease obligations (40) -
Repayments of long-term obligations (12,783) -
Borrowings from long-term obligations - 5,500
Tax benefit from exercise of stock options 115 -
-------- --------
Net cash provided by (used in) financing activities (12,557) 5,558
-------- -------
Net decrease in cash and temporary
cash investments (8,864) (5,080)
Cash and temporary cash investments, beginning
of period 17,586 6,234
-------- --------
Cash and temporary cash investments, end of period $ 8,722 1,154
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 976 $ 1,871
======= =======
Cash paid for income taxes (net of refunds received) $ 409 114
======= =======
The accompanying notes are an integral part of
these consolidated statements.
CIRCON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(In Thousands except Share Information)
General
- -------
The accompanying condensed consolidated financial statements include the
accounts of Circon Corporation (the Company) and its subsidiaries. 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 10K for the
year ended December 31, 1996.
The Company does not believe any recently issued accounting standards will
have a material impact on its financial condition or its operation.
(1) USSC Tender Offer
- ---------------------
On August 1, 1996, United States Surgical Corporation ("USSC") through its
wholly-owned subsidiary, USS Acquisition Corp., launched an unsolicited tender
offer (the "Offer") for all of the common stock of the Company at a price of
$18 per share. The Board of directors considered the Offer and recommended
that stockholders reject it so the Company can continue to pursue its
strategic plan. In reaching its conclusion, the Board retained and consulted
with Bear Stearns and Company as financial advisors and Wilson,Sonsini,
Goodrich & Rosati as legal advisors. In addition, the Company retained The
Abernathy/MacGregor Group Inc. to advise the Company on public relations
matters, Corporate Investor Communications, Inc. to assist the Company in
connection with communications to stockholders and William M. Mercer
Incorporated to advise the Board of Directors on certain employee matters.
In connection with rejecting the Offer, the Company adopted a Stockholders
Right Plan and an Employee Retention Plan, both of which are the subject of a
lawsuit brought by USSC against the Company and certain of its officers and
directors. In addition, the Company and certain of its directors and officers
are also defendants in certain class action lawsuits purportedly brought on
behalf of Circon stockholders. On December 16, 1996, USSC reduced the offer
to $17 per share and extended the solicitation until February 13, 1997.
On February 13, 1997, the offer was again extended to June 16, 1997. On June
19, 1997, USSC modified their tender offer by lowering the price to $14.50
and reducing the number of shares to 973,174 or 14.9% of Circon's total
outstanding shares. On July 15, 1997, USSC purchased 973,174 shares at
$14.50 per share. On August 5, 1997, USSC launched a new tender offer for
all of the common stock of the Company at a price of $16.50 per share.
The Company charged $3,000 in 1996 primarily for expenses related to the
Offer and defending the stockholder litigation.
(2) Facilities Shutdown Expense
- -------------------------------
During the second quarter of 1996, the Company announced the planned
closure of its Langhorne, Pennsylvania facility. The closure was 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 a pre-tax charge of $2,629 consisting of $2,174 of employee
severance, relocation and out-placement costs and $455 of cancellation of
operating leases, relocation of product and equipment and other facility closure
related costs.
(3) Non-Recurring Tax Benefit
- -----------------------------
During the second quarter of 1996, 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. With the liquidation, Circon's ability
to utilize these NOLS became more probable than not and the Company recognized
a non-recurring tax benefit by reducing the valuation allowance by $2,000 in
1996.
(4) 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 31,1996 and June 30, 1997 consist of the following:
1996 1997
------- ---------
Raw materials $ 11,995 $ 13,160
Work in process 17,938 20,076
Finished goods 5,190 7,104
--------- ---------
$35,123 $40,340
======= =========
(5) Long-Term Obligations
- ---------------------------
Long-term obligations as of December 31, 1996 and June 30, 1997 consist
of the following:
1996 1997
------- -------
Revolving credit facility $ 46,500 $ 52,000
Industrial development authority bonds
due December 2, 2006 4,435 4,435
Other 59 -
------- -------
50,994 56,435
------- -------
Less: current maturities (429) (370)
------- -------
$ 50,565 $ 56,065
======== =======
The Company has a $75,000 reducing revolving credit facility (the "Credit
Facility") which provides for direct borrowings and a maximum of $5,000 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 in the amount of approximately $4,577
as of June 30, 1997 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 facilities. These facilities had a net carrying value of $4,453
as of June 30, 1997.
The Company repurchased at par, 99.94% of the 7.5% convertible notes
pursuant to a vote of bondholders taken on November 20, 1995. Approximately
$50,500 of the Credit Facility and approximately $16,500 of available cash was
used to repurchase the notes in 1996.
Future principal maturities of the long term obligation are as follows:
1998 $ 390
1999 405
2000 430
2001 52,450
2002 475
Thereafter 1,915
-------
$ 56,065
========
(6) Litigation
- ---------------
See Discussion of Legal Proceedings in Part II, Item 1.
ITEM 2. Management's Discussion and Analysis of Operations and Financial
Condition
Three Months Ended June 30, 1997
Compared to Three Months Ended June 30, 1996
Sales
- ----------
Second quarter sales were up 9.2% to $40.5 million compared to $37.1 for the
1996 quarter. The second quarter sales were the highest of any quarter since
the merger with Cabot Medical in August of 1995. Sales by the U.S. sales force
totaled $30.7 million, a 7.8% increase over second quarter 1996.
Sales of other domestic medical products were $3.1 million, up 22.1% over the
comparable 1996 period. International sales were up 1.0% over prior year.
Gross Profit
- ------------------
Gross profit for the quarter totaled $21.8 million compared to $20.6 million
for the second quarter of 1996. Gross profit percentage of 53.8% of sales for
the quarter was down due to variations in the mix of products sold and slightly
lower prices.
Operating Expenses
- ----------------------
Operating expenses for the second quarter of 1997 were $20.3 million compared
to $21.8 million for second quarter 1996. Second quarter 1996 operating
expenses included a $2.1 million charge for the shutdown of Cabot Medical's
Langhorne facility. Excluding the shutdown charge in 1996, operating expenses
increased 3.2% although second quarter sales were up 9.2%.
Selling, and general and administrative expenses totaled $17.5 million, an
increase of 5.7% from comparable 1996 quarter. This increase resulted from a
revised sales incentive program, increased sales commissions (due to higher
sales), and expenses associated with the new French sales force. These
expenditures are all focused on improving overall sales performance.
Research and Development expenditures were $2.7 million, or 6.8% of sales and
down from the prior year, even though new product introductions have
accelerated. Consolidating R&D efforts into three centers of excellence, as a
result of closing Cabot Medical's Langhorne facility, has resulted in greater
efficiency and lower costs.
Income/EPS
- ------------------
As a result of higher sales and factors discussed above, second quarter
operating income was $1.5 million compared to a loss of $1.2 million in 1996.
In the second quarter of last year, a one time charge of $2.1 million was
recorded due to the shutdown of the Cabot Medical, Langhorne facility.
Income before taxes for the quarter was $0.7 million compared to a $2.1
million loss in the 1996 quarter.
Net income totaled $0.4 million or $0.03 per share for the quarter compared
to $0.7 million or $0.05 per share for the 1996 period. The 1996 period was
affected by a one-time NOL tax benefit of $2,000 million or $0.15 per share.
Six Months Ended June 30, 1997
Compared to Six Months Ended June 30, 1996
Sales
- ------
First half sales totaled $78.8 million compared to $77.0 million for the
same 1996 period. Sales by the U.S. sales force were $58.9 million and
international sales totaled $12.4 million compared to $58.2 million and $12.3
million, respectively, for the same 1996 period. Other domestic sales
were up 8.4% and Industrial sales were up 55.3%.
Gross Profit
- ------------
Gross profit for the first half of 1997 totaled $43.2 million compared to
$42.8 million in 1996. Gross profit as a percentage of sales for the first
half was 54.8% of sales, down from 55.6% for 1996. This decrease was due to
product mix and slightly lower prices.
Operating Expenses
- ------------------
Total operating expenses for first half 1997 were $39.7 million compared to
$40.4 million for first half 1996. The 1996 period includes a $2.1 million
charge related to closing Cabot Medical's Langhorne facility.
Selling, general and administrative expenses were $34.2 million, up 6.1% over
prior year. This reflects increased expenses in four areas: the first national
sales meeting since the sales force merge in October 1995; expenses associated
with the new French direct sales force; increased sales commissions due to
higher sales; and a revised incentive program. These expenditures are all
focused on improving overall sales performance.
Research and Development expenses were $5.5 million compared to $6.0 million
for 1996. Although expenses were down, new product introductions have
accelerated. This was accomplished by consolidating R&D efforts into three
centers of excellence as a result of closing Cabot Medical's Langhorne
facility, which resulted in greater efficiency and lower costs.
Income/EPS
- -----------
Operating income for the first half of 1997 totaled $3.5 million compared
to $2.4 million for 1996. A $2.1 million charge related to closing Cabot
Medical's Langhorne facility was included in the 1996 period. Operating income
was affected by the factors discussed above.
Net income totaled $1.2 million or $0.9 per share compared to $2.4 million or
$0.18 per share for the same 1996 period. The 1996 period includes a $2.1
million charge which was more than offset by a $2.0 million tax benefit.
Liquidity and Capital Resources
Circon's financial position remains strong with working capital of $68.6
million. Circon's current ratio is 4.8:1.
Since the first quarter of 1996, total assets have risen $4.6 million, total
debt decreased $3.1 million, and shareholder's equity rose $9.9 million,
reflecting a fundamental strengthening of the company.
For the year, $5.5 million of cash from increased borrowings was used to
finance the net $6.7 million of cash used in operating activities.
Accounts Receivable has increased $5.5 million due to the substantial sales
increase in 2nd quarter 1997 relative to 4th quarter 1996, coupled with a higher
mix of international sales which generally have longer payment terms.
Inventory increased $5.2 million from year-end primarily due to a build in
raw materials and work-in-process for new products, and increased safety stock
levels for disposable products.
Circon has a $75.0 million reducing secured revolving credit line with a
syndicate of banks. $50.5 million was used to repurchase Cabot notes in January
1996 (see footnote 5).
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 operations for the foreseeable future.
Forward Looking Statements
See Item 5 regarding forward looking statements in Part II 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. That
complaint alleged that 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 and to the combined companies'
future financial performance. In general the complaint alleged 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. On
July 29, 1996, defendants filed demurrers to the complaint on the ground that
plaintiffs' allegations fail 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. On September 20, 1996,
plaintiffs voluntarily dismissed Rudolf R. Schulte, Harold R. Frank, John F.
Blokker and Paul W. Hartloff, Jr. from the action, without prejudice. On
September 30, 1996, plaintiffs, joined by a third purported stockholder of the
Company, Adam Zetter, filed a first amended complaint against the remaining
defendants. Plaintiffs' amended complaint is substantially similar to the
original complaint, but adds a new purported cause of action under the unfair
business practices provisions of the California Business & Professions Code,
Sections 17200, et seq. and 17500, et seq. Like the original complaint,
the amended complaint seeks compensatory and/or punitive damages, attorneys
fees and costs, and any other relief (including injunctive relief) deemed
proper. On December 2, 1996, defendants filed demurrers to the amended
complaint again on the grounds that plaintiffs' allegations fail to state facts
sufficient to constitute a cause of action. On April 17, 1997, a hearing was
held regarding the defendants demurrers to the first amended complaint. By
order dated May 28, 1997, the superior court overruled defendants' demurrers
to the amended complaint and dissolved the stay of discovery. The Company
believes plaintiffs' allegations to be without merit and intends to defend the
lawsuit vigorously.
On August 15, 1996, an action captioned Steiner v. Auhll, et al.,
No. 15165 was filed in the Court of Chancery of the State of Delaware. Shortly
thereafter , three substantially similar actions were filed by three other
individuals claiming to be stockholders of Circon. All four actions allege
that Circon and certain of its officers and directors breached their fiduciary
duties to Circon's stockholders by taking steps to resist the hostile
tender offer by U.S. Surgical Corporation announced on August 2, 1996.
All four of these actions purport to be brought as class actions on behalf of
all Circon stockholders. On August 16, 1996, a separate action captioned
Krim v. Circon Corp., et al., No. 153767, was filed in the Superior Court of
California in Santa Barbara. The plaintiff in that action also claims to be a
Circon stockholder and purports to bring his claim as a class action. On
September 27, 1996, that action was stayed by the Court in favor of the actions
pending in Delaware; the Court also encouraged the plaintiff to refile his
action in Delaware. On or about August 30, 1996, the Chancery Court
consolidated the four Delaware complaints into a single action, and plaintiffs
filed an amended complaint. The Company and its officers and directors filed
an answer to the amended complaint on November 12, 1996. The Company believes
plaintiffs' allegations to be without merit and intends to vigorously defend
the lawsuits.
On September 17, 1996, an action captioned U.S. Surgical Corporation v.
Auhll, et al., No. 15223NC was filed in the Court of Chancery of the State of
Delaware. The complaint in this action also alleges that Circon and certain of
its officers and directors breached their fiduciary duties to Circon's
stockholders by taking steps to resist U.S. Surgical's hostile tender offer.
The Company and its officers and directors filed an answer to the complaint on
November 12, 1996. The Company believes plaintiff's allegations to be without
merit and intends to vigorously defend the lawsuit.
Item 5. Other Information
The Board of Directors of Circon Corporation has set Monday, October 6,
1997 as the date of the Annual Meeting of Stockholders. The time and location
of the meeting will be set forth in the official notice of the meeting to be
sent to stockholders later in August. Only stockholders of record on August
11, 1997 are entitled to notice of and to vote at the meeting.
Notice of any business to be presented by a stockholder at the Annual
Meeting must be received by the Company at its principal executive offices in
Santa Barbara by September 1, 1997. The contents of such notice must satisfy
the requirements set forth in the Company's bylaws.
- ------------------------------------------------------------------------------
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. Critical to the
realization of the benefits of the Merger is the complete and successful
integration of the Companies. Although the integration is substantially
complete, several important elements are still in progress. There can be no
assurance that these final elements will be completed or that if they are
completed they will result in the expected benefits and synergies. Following
the Merger, the Company had to cross train both former sales forces to sell
the medical devices carried by the other. Although some sales personnel have
produced significantly increased sales, others have experienced significantly
lower sales productivity. The failure of the bottom tier of the sales force to
grow sales could adversely impact the sales synergies the Company realizes as a
result of the Merger. In addition, the closure of the Langhorne facility
involved organizational changes or shifts in employee responsibilities, as well
as other factors, that have resulted and may continue to 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 absorb the Cabot product line and
replace former key Cabot employees could also result in the expected cost
savings and sales synergies not being realized.
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 has had, and may continue to have,
various adverse effects 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, the distraction of management and other key employees
and the fees and other expenses of financial, legal and other advisors to the
Company in responding to the tender offer and related law suits.
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 which
may adversely affect Circon's business.
Government Regulation
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. While the Company believes they are
currently in compliance, if Circon 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. 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 healthcare
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
maintains 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.
New Products
Circon's growth depends in part on its ability to introduce new and
innovative products that meet the needs of medical professionals. Although
Circon has historically been successful at bringing new products to market,
there can be no assurance that Circon will be able to continue to introduce
new and innovative products or that the new products that Circon introduces,
or has introduced, will be widely accepted by the marketplace. The failure
of the Company to continue to introduce new products or gain wide spread
acceptance of a new product could adversely affect the Company's operations.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit Index
3.2A Bylaws of Circon Corporation, as amended.
(b) The Company filed no reports on Form 8-K in the Second Quarter of 1997
with the Securities and Exchange Commission.
RESOLUTIONS OF THE BOARD OF DIRECTORS
OF CIRCON CORPORATION
(Unanimously adopted on June 13, 1997)
WHEREAS, the Board of Directors of the Corporation has determined that
it is in the best interest of the Corporation to amend Section 2.2 of the
Bylaws of the Corporation to provide that the Annual Meeting of Stockholders
of the Corporation shall be held each year on such date and at sutch time
and place as may be determined by the Board of Directors.
NOW THEREFORE, BE IT RESOLVED, that the first sentence of Section 2.2,
of the Bylaws of the Corporation is replaced with the following:
2.2 The annual meeting of the stockholders shall be held each year on
such date and at such time and place as may be determined by the Board of
Directors.
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, 1997
- ------------------- --------------------
Date RICHARD A. AUHLL
President
Chief Executive Officer
August 14, 1997
- ------------------- -----------------------
Date R. BRUCE THOMPSON
Executive Vice President
Chief Financial Officer
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