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, 1998 COMMISSION FILE NO. 0-12025
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CIRCON CORPORATION
- -----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-3079904
- ---------------- -----------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation
or organization)
6500 Hollister Avenue, Santa Barbara,California 93117-3019
- ------------------------------------------------------------------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (805) 685-5100
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Indicate by check mark whether the
registrant (1) has filed all reports
required to be filed by Section 13
or 15(d) of the Securities Exchange Act
of 1934 during the preceding 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, 1998: 13,396,794
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND JUNE 30,1998
ASSETS
(In thousands, except per share amounts)
(UNAUDITED)
December 31, June 30,
1997 1998
--------- ---------
CURRENT ASSETS:
Cash and temporary cash investments $ 3,660 $ 2,242
Marketable securities 1,115 1,131
Accounts receivable, net of allowance of
$1,606 in 1997 and $1,583 in 1998 32,024 28,142
Inventories 38,489 42,728
Prepaid expenses and other assets 3,470 2,359
Deferred income taxes 5,172 3,698
--------- ---------
Total current assets 83,930 80,300
--------- ---------
DEFERRED INCOME TAXES 1,289 1,289
PROPERTY, PLANT, AND EQUIPMENT, NET 53,503 52,201
OTHER ASSETS, at cost net of accumulated amortization 30,635 29,600
--------- ---------
Total assets $ 169,357 $ 163,390
========= =========
The accompanying notes are an integral part of
these consolidated balance sheets.
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND JUNE 30,1998
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands, except per share amounts)
(UNAUDITED)
December 31, June 30,
1997 1998
--------- ---------
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 390 $ 390
Accounts payable 4,629 4,468
Accrued liabilities 10,892 9,837
Customer deposits 688 816
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Total current liabilities 16,599 15,511
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NONCURRENT LIABILITIES:
Long-term obligations 48,799 40,299
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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
13,293,812 and 13,396,794 issued and outstanding
in 1997 and 1998, respectively 133 134
Additional paid-in capital 105,079 106,183
Cumulative translation adjustment (1,197) (1,625)
Accumulated (deficit) earnings (56) 2,888
--------- ---------
Total shareholders' equity 103,959 107,580
--------- ---------
Total liabilities and shareholders'
equity $ 169,357 $ 163,390
========= =========
The accompanying notes are an integral part of
these consolidated balance sheets.
<TABLE>
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Three months ended Six months ended
June 30, June 30,
(UNAUDITED (UNAUDITED) (UNAUDITED) (UNAUDITED)
1997 1998 1997 1998
--------- --------- --------- ---------
NET SALES $ 40,455 $ 37,251 $ 78,848 $ 73,530
Cost of sales 18,673 16,434 35,600 32,305
-------- --------- --------- ---------
GROSS PROFIT 21,782 20,817 43,248 41,225
OPERATING EXPENSES:
Research and development 2,743 2,700 5,527 5,468
Selling, general and administrative 17,517 14,845 34,196 29,727
--------- -------- --------- ---------
Total operating expenses 20,260 17,545 39,723 35,195
INCOME FROM OPERATIONS 1,522 3,272 3,525 6,030
Interest income 40 5 181 15
Interest expense (1,000) (793) (1,919) (1,667)
Other income, net 115 141 106 151
--------- -------- --------- ---------
INCOME BEFORE INCOME TAXES 677 2,625 1,893 4,529
Provision for income taxes 237 900 662 1,585
--------- -------- --------- ---------
NET INCOME $ 440 $ 1,725 $ 1,231 $ 2,944
========= ======== ========= =========
BASIC AND DILUTED EARNINGS PER SHARE : $ 0.03 $ 0.13 $ 0.09 $ 0.22
======== ======== ========= =========
Weighted Average Number of Shares of Common
Stock and Equivalents Outstanding
BASIC 13,245 13,378 13,243 13,343
--------- -------- --------- ---------
DILUTED 13,572 13,775 13,620 13,650
--------- -------- --------- ---------
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 1997 1998
-------- --------
Net income $ 1,231 $ 2,944
Adjustments to reconcile net
income to cash provided by (used in)
operating activities:
Depreciation and amortization 4,272 4,306
Change in assets and liabilities:
Accounts receivable (5,481) 3,882
Inventories (5,217) (4,239)
Prepaid expenses and other assets 88 2,486
Accrued liabilities (1,802) (1,216)
Customer deposits 205 128
--------- --------
Net cash provided by (used in) operating activities $ (6,704) $ 8,291
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases noncurrent assets (3,158) (1,886)
--------- --------
Net cash used in investing activities $ (3,158) (1,886)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 58 1,105
Borrowing (payments) of long-term obligations 5,500 (8,500)
--------- -------
Net cash provided by (used in) financing activities $ 5,558 $ (7,395)
--------- -------
Cumulative translation adjustment (776) (428)
--------- -------
Net decrease in cash and temporary
cash investments (5,080) (1,418)
Cash and temporary cash investments, beginning
of period 6,234 3,660
--------- -------
Cash and temporary cash investments, end of period $ 1,154 $ 2,242
========= =======
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 1,871 $ 1,581
========= =======
Cash paid (refunded) for income taxes, net $ 114 (765)
========= =======
The accompanying notes are an integral part of
these consolidated statements.
CIRCON CORPORATION
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JUNE 30, 1998
-------------
UNAUDITED
(In thousands except share information)
General
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The accompanying consolidated financial statements include
the account of Circon Corporation (the Company) and its subsidiaries.
All significant intercompany transactions and accounts have been
eliminated in consolidation.
The consolidated financial statements included herein have
been prepared by the Company 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 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, 1997.
The Company does not believe any recently issued
accounting standards will have a material impact on its financial
condition or its results of operations.
(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 could 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.
On July 15, 1998, USSC agreed to postpone the lawsuit until
after Circon holds its annual meeting later in the year. 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
7.3% 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. On October 22, 1997, USSC extended the offer
of $16.50 per share until November 25, 1997. On November
25, 1997, the offer of $16.50 per share was extended until
January 15, 1998. On January 15, 1998, the offer of $16.50
per share was extended until July 16, 1998. In May 1998,
USSC agreed to be acquired by Tyco International in a
transaction scheduled to close later in the year. On July
16, 1998, the offer of $16.50 per share was extended until
September 15, 1998.
(2) 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, 1997
and June 30, 1998 consist of the following:
1997 1998
--------- ---------
Raw materials $ 8,559 $ 9,021
Work in process 18,309 20,328
Finished goods 11,621 13,379
--------- ---------
$ 38,489 $ 42,728
========= =========
(3) Long-Term Obligations
---------------------
Long-term obligations as of December 31, 1997 and
June 30, 1998 consist of the following:
1997 1998
--------- ---------
Revolving credit facility $ 46,000 $ 37,500
Industrial development authority bonds
due December 2, 2006 3,165 3,165
Other 24 24
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49,189 40,689
Less: current maturities (390) (390)
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$ 48,799 $ 40,299
========== =========
The Company has a five year $75,000 reducing revolving
credit facility (the "Credit Facility") with a syndicate of banks which
provides for direct borrowings and a maximum of $5,000 in letters
of credit. The line of availability under the credit facility is reduced
by $3,000 every six months and is $63,000 at June 30, 1998. 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 $3,307 as of June 30, 1998 underlying $3,165 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 $4,394 as of June 30, 1998.
Future principal maturities of the long term obligation are
as follows:
1998 390
1999 405
2000 430
2001 37,950
2002 475
Thereafter 1,039
--------
$ 40,689
========
(4) Comprehensive Income
Components of other comprehensive income for the
Company consist of foreign currency items and the amounts
for the period ended June 30, 1998 and accumulated to date
are $428 and $1,625, respectively.
(5) 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, 1998
Compared to Three Months Ended June 30, 1997
Sales
-----
Second quarter sales were $37.3 million compared to
$40.5 million for the 1997 quarter. Total domestic sales were
$32.3 million compared to last year's $33.8 million. Sales by the
U.S. sales force totaled $28.9 million, in the current year,
compared to the prior year's $30.6 million. International and
other sales were $5.0 million compared to the same 1997
period of $6.7 million.
U.S. sales force sales were affected by higher than
normal sales force turnover. International sales were down
due to continued strengthening in the U.S. dollar and reduced
health care expenditures in Pacific rim countries.
Gross Profit
------------
Gross profit as a percentage of sales increased
from 53.8% last year to 55.9% for the current period.
This improvement is the result of sales mix and reduced
manufacturing overhead coupled with manufacturing
efficiency gains. However, gross profit decreased from
$21.8 million in 1997 to $20.8 million in the second quarter
of 1998 due to lower sales volume.
Operating Expenses
------------------
Second quarter operating expenses of $17.5 million
were down $2.8 million or 13.4% compared to the prior year
second quarter of $20.3 million. Second quarter operating
expenses were 47.1% of sales, down from 50.1% in 1997.
This was due to the cost reduction programs instituted over
the past year.
Sales and marketing expenses have been cut 16.1%
due to reduced sales meeting and convention expenses, tighter
controls over field inventory/samples and other cost saving
actions. General and administrative expenses are down 12.6%
due to the consolidation of international facilities and reduced
amortization from assets acquired from the Cabot acquisition.
Research and development expenditures of $2.7
million were level with last year.
Income/EPS
----------
As a result of the factors discussed above, operating
income for the 2nd quarter 1998 of $3.3 million increased 115.0%
over prior year's $1.5 million. Operating income grew to 8.8%
of sales in 1998 versus 3.8% in 1997. Income before taxes of
$2.6 million in 1998 compared to $0.7 million in 1997, was up
287.7% and net income of $1.7 million for the 2nd quarter 1998,
increased 292.0% over prior year's $0.4 million. EPS was
$0.13, up from last year's $0.03.
Six Months Ended June 30, 1998
Compared to Six Months Ended June 30, 1997
Sales
-----
First half sales totaled $73.5 million compared to $78.8
million for the same 1997 period. Total domestic sales were
$63.9 million compared to last year's $64.9 million. Sales by
the U.S. sales force were $57.3 million and international and
other totaled $9.7 million compared to $58.8 million and $14.0
million, respectively, for the same 1997 period.
In the third quarter, several important new product
launches are scheduled, including the Dolphin Hysteroscopy
pump, the Surgiflex Wave suction-irrigation probe and the
initial transvaginal hydrolaparoscopy product line. These
products compliment new products launched in the past six
months, including the IP4.1 video camera, distortion-free
5mm and 10mm laparoscopes, and the ACNII flexible
cystonephroscope.
Gross Profit
------------
Gross profit as a percentage of sales for the first half of
1998 was 56.1% of sales, up from 54.8% for the first half of 1997.
This increase was due to sales mix and reduced manufacturing
overhead coupled with manufacturing efficiency gains.
Operating Expenses
------------------
Total operating expenses of $35.2 million were down
11.4% compared to prior year's $39.7 million.
Sales and marketing expenses have been cut 13.7% from
last year. This was due to a combination of reduced sales meeting
and convention expenditures, tighter controls over field
inventory/samples and other cost saving factors. General and
administrative expenses are down 11.2% for the first half due
to the consolidation of international facilities and reduced
amortization from assets acquired from the Cabot acquisition.
Research and development expenditures have remained
essentially level with last year.
Income/EPS
----------
Operating income for the first half of 1998 totaled
$6.0 million compared to $3.5 million due to the factors
discussed above. Income before taxes of $4.5 million
compared to $1.9 million was up 139.2% and net income
of $2.9 million increased 139.2% over prior year's $1.2
million. EPS for the first six months of 1998 was $0.22
compared with $0.09 for 1997.
Liquidity and Capital Resources
Circon's financial position remains strong with working
capital of $64.8 million. Circon's current ratio is 5.1:1.
For the first half, borrowings decreased by $8.5
million as cash from operations was used to pay down debt.
Accounts Receivable decreased $4.9 million due
to strong collections and lower first half 1998 sales
compared to second half of 1997.
Inventory increased $4.2 million due to a build in
raw materials and work-in-process for new products.
Circon has a $75.0 million secured reducing
revolving credit line with a syndicate of banks. The
credit line reduces by $3.0 million every six months and
credit availability on the line totaled $63.0 million at June
30, 1998. There is currently $37.5 million outstanding
(See Footnote 3).
The Company believes that cash flow from operations,
existing cash, marketable securities and available cash from
bank credit facilities are adequate to fund the Company's
existing operations for the foreseeable future.
Year 2000 Compliance
--------------------
Circon Corporation is in the process of replacing its
entire internal management information system with new software
and hardware which is year 2000 compliant. The majority of the
expenses on this project have already been incurred and total
$1.7 million. The project is expected to be completed by
December 1998. Software provided and operated by third
parties are also currently under evaluation.
In addition, Circon's Manufacturing and Research and
Development staffs are in the process of reviewing all
manufacturing processes, manufactured products and
secondary compliance issues with significant vendors
related to the year 2000 issue.
At the present time, the Company has not identified
any compliance issues that cannot be resolved within the
required time frames or will have a material impact on the
Company's business or financial results.
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 the defendant's demurrers to
the amended complaint. The parties are now engaged in
discovery proceedings. 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. On July 15, 1998, plantiffs agreed to postpone further
action in the case until after Circon holds its annual meeting later
in the year. The Company believes plaintiffs' allegations to be
without merit and intends to vigorously defend the lawsuits in the
event that plaintiffs continue to pursue the matter.
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. On or
about October 28, 1997, U.S. Surgical filed an Amended and
Supplemental Complaint (the "Amended Complaint"). The
Amended Complaint repeats the allegations in U.S. Surgical's
September 17, 1996 complaint and adds new allegations
regarding the supposed breaches of fiduciary duties by certain
officers and directors of Circon since the filing of the September
17, 1996 complaint. On July 15, 1998, U.S. Surgical agreed to
postpone the lawsuit until after Circon holds its annual meeting
later in the year. The Company believes plaintiff's allegations
to be without merit and intends to vigorously defend the lawsuit
in the event that U.S. Surgical continues to pursue the matter.
Item 5.
Additional Cautionary Statements
- --------------------------------
No Assurance of Cost Savings or Revenue/Earnings
Growth as provided in the Company's Strategic Plan.
Circon has implemented the initial phases of a
comprehensive strategic plan to maximize value for shareholders
that includes cost cutting and revenue/earnings growth components.
Implementation and achievement of the strategic plan is critical to
the success of the Company and the achievement of its corporate
goals. Although the strategic plan has already begun to yield
positive results, there can be no assurance that this trend will
continue. The failure of the Company to achieve cost and expense
reductions in accordance with the strategic plan, or the occurrence
of unforeseen expenses, could adversely affect the Company's
ability to achieve the goals set forth in the strategic plan. Cost
cutting measures include the elimination of certain personnel, the
decision to not fill several open positions, the reduction in
quantities of samples provided to the sales force, and the reduction
of salaries for certain senior executives. There can be no assurance
that such cost cutting will not have an adverse effect on the
Company's operations. The sales force has gone through a
significant reorganization since the merger with Cabot Medical in
1995 and has not yet demonstrated the productivity required to
achieve the goals of the strategic plan. In addition, the strategic
plan provides for revenues/earnings growth which is contingent in
large part on the success of both the sales force and the
Company's new products, some of which have not yet been
introduced to the marketplace. The failure of the sales force to
achieve targeted results or of the Company's new products to be
accepted in the market may have a material adverse effect on
the Company's financial results and its ability to meet the goals
established in the strategic plan.
Disruptive Effect of Hostile Tender Offer
On August 2, 1996, a subsidiary of United States
Surgical Corporation ("USSC") 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.
On October 6, 1997, two individuals who were nominated
by USSC to serve on the Circon Board were elected by the
shareholders of the Corporation. A precatory resolution sponsored
by USSC calling for the Board of Circon to arrange for the prompt
sale of the Company was also approved by the shareholders.
In addition, USSC filed a lawsuit in the State of Delaware which,
among other things, seeks to force the Board to redeem the
Shareholder Rights Plan and have the Employee Retention
Plans nullified. No assurance can be given that these actions
will not exacerbate one or more of the potential adverse effects
mentioned above.
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
it is 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 not passed comprehensive healthcare reform
legislation to date, Circon anticipates that Congress, state
legislatures and the private sector will continue to review and
alternative healthcare 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 it believes 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.
For example, there can be no assurance that Circon will be
successful with its market launch of the products to be used
with the new Transvaginal Hydrolaparoscopy (THL) procedure.
The failure of the Company to continue to introduce new
products or gain wide spread acceptance of a new product,
like the products to be used with the THL procedure, could
adversely affect the Company's operations.
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 13, 1998 /s/Richard A. Auhll
--------------- --------------------
Date RICHARD A. AUHLL
President
Chief Executive Officer
August 13, 1998 /s/R. Bruce Thompson
--------------- ---------------------
Date R. BRUCE THOMPSON
Executive Vice President
Chief Financial Officer
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