FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT #1
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR QUARTER ENDED September 30, 1996 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 September 30, 1996: 13,224,267
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND SEPTEMBER 30,1996
ASSETS
(In thousands, except for share amounts)
(UNAUDITED)
December 31, September 30,
1995 1996
--------- ---------
CURRENT ASSETS:
Cash and temporary cash investment $ 17,586 $ 10,988
Marketable securities 6,496 1,636
Accounts receivable, net of allowance of
$1,807 in 1995 and $1,965 in 1996 26,539 25,993
Inventories 31,645 33,874
Prepaid expenses and other assets 2,627 3,547
Deferred income taxes 5,932 7,088
---------- ---------
Total current assets 90,825 83,126
PROPERTY, PLANT, AND EQUIPMENT, NET 53,750 53,297
OTHER ASSETS 36,824 34,428
--------- ---------
Total assets $ 181,399 $ 170,851
========= =========
The accompanying notes are an integral part of
these consolidated balance sheets.
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands, except for share amounts)
(UNAUDITED)
December 31, September 30,
1995 1996
----------- -------------
CURRENT LIABILITIES:
Current maturities of long-term $ 15,857 $ 574
Accounts payable 7,728 5,092
Accrued liabilities 10,796 12,967
Customer deposits 1,079 1,400
----------- -------------
Total current liabilities 35,460 20,033
NONCURRENT LIABILITIES:
Long -term obligations 56,435 54,435
Deferred income taxes 2,251 546
Capital lease obligation 81 21
---------- --------------
Total noncurrent 58,767 55,002
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 13,224,267 issued and
outstanding in 1995 and 1996 respectively 126 132
Additional paid-in capital 94,928 102,578
Minimum pension liability (143) (143)
Cumulative translation adjustment (513) (364)
Accumulated Deficit (7,226) (6,387)
--------- ---------
Total shareholders' equity 87,172 95,816
Total liabilities and shareholders'
equity $ 181,399 $ 170,851
========= =========
The accompanying notes are an integral part of
these consolidated balance sheets.
CIRCON CORPORASUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Three months ended Nine Months ended
September 30, September 30,
------------------------- --------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITD) (UNAUDIT
1995 1996 1995 1996
--------- ---------- ------------ ------------ --------
NET SALES $ 42,113 $ 38,369 $ 121,867 $ 115,393
Cost of sales 18,635 17,030 55,387 51,260
Non-Recurring business integration 4,212 - 4,212 -
--------- ---------- ------------ ---------- --------
GROSS PROFIT 19,266 21,339 62,268 64,133
OPERATING EXPENSES:
Research and development 2,867 3,174 8,433 9,209
Selling, general and administrative 15,556 15,808 48,856 48,026
Non-Recurring business integration expense 4,221 - 4,221 -
Reversal of Cabot restructuring charge - - (188) -
Facilities shutdown expense (see note 1) - 500 - 2,629
--------- ----------- ----------- -----------
Total operating expenses 22,644 19,482 61,322 59,864
INCOME (LOSS) FROM OPERATIONS (3,378) 1,857 946 4,269
Non-Recurring transaction costs (4,936) - (4,936) -
USSC Tender Offer (see note 2) - (3,200) - (3,200)
Interest income 312 86 970 347
Interest expense (1,515) (1,121) (4,394) (3,251)
Other income (expense), net 12 32 47 (83)
--------- ----------- ----------- ------------
INCOME (LOSS) BEFORE PROVISION (9,505) (2,346) (7,367) (1,918)
FOR INCOME TAXES
Benefit for income taxes (2,131) (821) (959) (757)
Non-recurring tax benifit (see note 3) - - - (2,000)
--------- ----------- ------------ -----------
NET INCOME (LOSS) $ (7,374) $ (1,525) $ (6,408) $ 839
========= =========== ============ ===========
EARNINGS PER SHARE: $ (0.56) $ (0.11) $ (0.49) $ 0.06
========= =========== ============ ===========
Weighted Average Number of Shares of Common
Stock and Equivalents Outstanding 13,198 13,431 13,034 13,201
========= ============ ============ ===========
The accompanying notes are an integral part of
these consolidated statements.
</TABLE>
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September, 30
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES 1995 1996
-------- --------
Net income $ (6,408) $ 839
Adjustments to reconcile net
income to cash provided by
operating activities:
Depreciation and amortization 9,079 6,364
Deferred income taxes 88 (2,861)
Change in assets and liabilities:
Accounts receivable (962) 546
Inventories (3,971) (2,229)
Prepaid expenses and other assets 1,086 (920)
Other assets 857 96
Accounts payable 3,101 (2,636)
Accrued liabilities 1,253 3,082
Accrued Interest (1,162) (911)
Customer deposits 29 321
-------- --------
Net cash provoperating activities 2,990 1,691
-------- --------
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September, 30
(In Thousands)
CASH FLOWS FROM INVESTING ACTIVITITIES 1995 1996
-------- -------
Disposals of marketable securities, net 1,444 4,860
Purchases of property, plant and equipment (3,921) (3,611)
Cumulative translation adjustment 595 149
-------- --------
Net cash provided by (used in) investing activities (1,882) 1,398
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,128 4,349 -
Repayments of capital lease obligations (212) (60)
Repayments of long-term obligations (1,277) (17,283)
Tax benefit from exercise of stock options - 3,307
Other 272 0
-------- --------
Net cash provided (used in) financing (89) (9,687)
Net increase (decrease) in cash and temporary
cash investments 1,019 (6,598)
Cash and temporary cash investments, beginning
of period 2,883 17,586
-------- -----------
Cash and temporary cash investments, end of period $ 3,902 $ 10,988
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 5,283 $ 1,861
========= ===========
Cash paid for income taxes $ 948 $ 992
========= ==========
The accompanying notes are an integral part of
these consolidated statements.
CIRCON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
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 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.
In the third quarter, the Company recorded an additioinal $500,000 charge
consisting of employee severance, relocation, out placement costs and other
miscellaneous charges.
(2) USSC Tender Offer
On August 2, 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 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 to advise the Board 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. The Company has reserved
$3,200,000 for expenses related to the Offer and the stockholder litigation.
(See PART II Item (1) Legal Proceedings).
(3) 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.
(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, 1995 and September 30, 1996 consist of the
following: (000's)
1995 1996
------- ------
Raw materials $ 11,017 $ 8,209
Work in process 12,243 15,543
Finished goods 8,385 10,122
------- -------
$ 31,645 $ 33,874
======= =======
(5) Long-TerObligations
Long-terobligations as of December 31, 1995 and
September 30, 1996 consis(000's)
1995 1996
------- -------
Note payable to bank under a reducing
revolving line of credit of $72,000,000,
secured by substantially all of the
Company's assets, with interest at
0.95 points above the Eurodollar rate
(6.825% at September 30, 1996). $ - $50,000
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 $ 54,435
--======= =========
The Company has a $72 million reducing 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 facilities.
These facilities had a net carrying value of $5.170 million as of
September 30, 1996.
During 1996, the Company repurchased the $67,000,000 convertible
notes. $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: (000's)
1996 $ 574
1997 370
1998 390
1999 405
2000 430
Thereafter 52,840
--------
$ 55,009
========
ITEM 2. Management's Discussion and Analysis of Operations and
Financial Condition
RESULT OF OPERATIONS
General
On August 28, 1995, Circon Corporation acquired Cabot Medical
Corporation. This report presents Circon and Cabot for the 1995 third
quarter and nine month periods as if they had always been merged, which
is required under pooling of interest accounting rules.
All Cabot Medical Common Shares have been converted into Circon
Common Shares at a ratio of 0.415 shares of Circon for each share of Cabot.
In the process of merging, Circon and Cabot incurred one-time
business integration merger expenses totalling $13.4 million pretax and $9.8
million after tax which are reflected in the 1955 third quarter.
A total of $8.4 million of one-time expenses associated with eliminating
duplicative, excess, obsolete inventories and related production equipment,
and reorganizing and cross training the sales force, are noted in the
appropriate cost and expense categories as a business integration expense.
The $4.9 million of fees and other expenses specifically associated with the
merger process are noted as non-recurring transaction costs.
The nine months 1995 include the above mentioned $13.4 million
pretax and a $0.2 million reversal of previously expensed restructuring charges
by Cabot Medical.
Three Months Ended September 30, 1996
Compared to Three Months Ended September 30, 1995
Sales
-------
Third quarter 1996 sales by the U.S. sales force of $30.0 million were
the highest of any quarter since the merger with Cabot Medical in August 1995,
up 5% over the second quarter 1996, but 3% below the record third quarter
1995. Third quarter total sales of $ 38.4 million were 9% below the all time
high third quarter 1995.
The focused attention on improving the performance of the sales force
is showing early signs of sales growth returning to normal levels. All changes
were due to volume as price changes were nominal in the quarter.
Gross Profit
------------
For comparative purposes, the one time business integration/merger
expenses have been excluded from gross profit, operating expense and operating
income discussions for the third quarter 1995.
Third quarter gross profit totalled $21.3 million or 55.6% of sales
compared to $23.5 million or 55.8% of sales. The slight change in gross
profit between the two periods was due to lower sales levels and differences
in the mix of products sold.
Operating Expense
-----------------
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 19A $2.1 million charge associated with the closing is
included in the second quarter results. Additional expenses associated
with winding down the operations and transferring production to other
facilities of $0.5 million was incurred in the third quarter.
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 was essentially completed by
the end of OctobA few employees remain until the end of the year
in a caretaking function, pending the commencement of leases for the entire
facility.
Although third quarter total sales were up 4% over the immediately
preceding second quarter, operating expenses, excluding unusual
non-recurring charges, were down $650,000 or 3% from the same period.
The 5% reduction in selling, general and administrative expenses from the
second quarter was partially offset by increased R&D expenses. Third
quarter R&D expenditures were $3.2 million or 8% of sales. Compared
to third quarter 1995, operating expenses for the quarter were up 3%.
In addition, an unusual non-operating charge of $3.2 million,
associated with the U.S. Surgical hostile tender offer and shareholder
lawsuits, is included in the third quarter and nine months 1996 results.
Operating Income
----------------
Operating income of $2.4 million for the third quarter was up 145%,
excluding unusual non-recurring charges, over the immediately preceding
second quarter due to increased sales and operating expense trends
discussed above. Third quarter 1996 operating income was down 53%
from the comparable 1995 period.
Interests and Other Expense
---------------------------
Third quarter 1996 interest expense of $1.1 million was down 26%
from the same 1995 period due to lower total debt and lower interest rates.
In January 1996, Cabot's $67 million convertible subordinated notes were
refinanced with a new revolving bank credit line. Third quarter 1996 had
interest and other income of $0.1 million compared to $0.3 million for the
1995 period.
Income Taxes
-------------
Third quarter 1996 provision for income taxes is a $0.8 million tax
benefit or 35% of the pretax loss. This compares to third quarter 1995
income tax benefit of $2.1 million or 22% of the pretax loss. All remaining
Cabot NOL benefits were fully utilized in the second quarter 1996
(see Footnote 3).
Net Income and Earnings Per Share
----------------------------------
While the third quarter operating income was $2.4 million, the $3.7
million non-recurring charges caused Circon to record a net loss for the
1996 quarter of $1.5 million, compared to a $7.4 million loss in the 1995
quarter which included Circon-Cabot merger charges. On the same basis,
EPS for the third quarter is $(0.11) compared to $(0.56) for the same 1995
period. Excluding unusual non-recurring charges, 1996 third quarter
earnings per share, after interest and taxes, was $0.07 compared to
break-even for the immediately preceding second quarter.
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 The Company expects that the primary
impact of these measures will not occur 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 or the timing or magnitude
of the benefits.
Nine Months Ended September 30, 1996
Compared to Nine Months Ended September 30, 1995
Sales
-------
Sales of $115.4 million were down 5% from the same 1995 period.
Price erosion in the nine months of 1996 accounted for about 1.5% of the
total decrease.
Gross Profit
-------------
In order to provide perspective as to Circon's operating performance,
the following discussion of gross profit, operating expenses and operating
income exclude one-time business integration/merger, facility closure and
tender offer expenses from the 1995 and 1996 results, as appropriate.
Gross profit for nine months was $64.1 million or 55.6% of sales
compared to $66.5 million or 54.6% of sales for the same 1995 period.
Increased manufacturing efficiencies and some stabilization in
pricing of Cabot products have caused the gross profit improvement.
Operating Expenses
------------------
Operating expenses totalled $57.2 million for the nine months 1996,
virtually unchanged from the 1995 period. Expense reductions and cost
savings in the selling, general and administrative areas have been offset
by increased expenditures for Research & Development. R&D expenditures
of $9.2 million are up over 9% year to year and are 8% of sales, year to date.
Operating Income
-----------------
Operating income for the nine months 1996 totalled $6.9 million, down
25% from the comparable 1995 period. The decline in sales partially offset
by the improved gross profit percentage is the primary cauthis change.
Interest and other Expenses
----------------------------
Nine months interest expense is down $1.1 million or 26% compared
to the 1995 period due to debt reductions and lower interest rates. The drop
in interest expense is partially offset by $0.6 million decrease in interest
income and a $0.1 change in other income and expense.
Income Taxes
--------------
The provision for income taxes for the nine months 1996 reflects a
$2.0 million non-recurring net operating loss carry forward benefit as a result
of Cabot medical being liquidated and merged into Circon (see Footnote 3).
Net Income
------------
Net income for nine months 1996 totalled $0.8 million compared to
a net loss of $6.4 million for the 1995 period, due to the factors discussed
above.
Liquidity and Capital Resources
Circon has a $72.0 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 Footnote 5).
As of September 30, 1996 the Company had cash and marketable
securities totalling $12.6 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 operations 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. 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. The Company believes plaintiffs' allegations to be without merit and
intends to vigorously defend the lawsuit.
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, The Company believes plaintiff's allegations to be
without merit and intends to vigorously defend the lawsuit.
Item 5. Other Information.
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 successful. 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 to 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. Finally, the Company adopted a Stockholders Rights Plan
which provides that if an acquiror obtains 15% or more of the Company's
stock, then all the Company's stockholders (other than the acquiror) will be
able to purchase additional shares of the Company's common stock, or the
acquiror's common stock in certain cases, at half price. 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
3.1D Certificate of Designation of Rights, preferences and
priviledges of Series A participating stock of Circon
Corporation (incorporated by reference to the
registration statement on Form 8A filed by the Company
on August 15, 1996.)
10.14. Form of Indemnification Agreement with directors and
executive officers, (incorporated by reference to the
Schedule 104-9 filed by the Company on August 16, 1996.)
10.15. Form of Employee Retention Plan for certain officers
(incorporated by reference to Amendment No. 3 to the
Schedule 14d-9 filed by the Company August 27, 1996).
(b) The Company filed no reports on Form 8-K in the Second
Quarter of 1996 with the Securities and Exchange
Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
CIRCON CORPORATION
Registrant
November 14, 1996
- ----------------
Date RICHARD A. AUHLL
President
Chief Executive Officer
November 14, 1996
- ------------------
Date R. BRUCE THOMPSON
Executive Vice President
Chief Financial Officer
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