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 March 31, 1998 COMMISSION FILE NO.
0-12025
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
- ---------------------
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 March 31, 1998: 13,326,812
----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND MARCH 31,1998
ASSETS
(In thousands, except for share amounts)
(UNAUDITED)
December 31, March 31,
1997 1998
--------- ---------
CURRENT ASSETS:
Cash and temporary cash investments $ 3,660 $ 3,340
Marketable securities 1,115 1,119
Accounts receivable, net of allowance of
$1,606 in 1997 and $1,617 in 1998 32,024 29,159
Inventories 38,489 40,587
Prepaid expenses and other assets 3,470 2,607
Deferred income taxes 5,172 4,181
---------- ----------
Total current assets 83,930 80,993
---------- ----------
DEFERRED INCOME TAXES 1,289 1,289
PROPERTY, PLANT, AND EQUIPMENT, NET 53,503 52,992
OTHER ASSETS, at cost net of accumulated amotization 30,635 30,018
--------- ----------
Total assets $ 169,357 $ 165,292
========= ==========
The accompanying notes are an integral part of
these consolidated balance sheets.
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND MARCH 31,1998
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands, except for share amounts)
(UNAUDITED)
December 31, March 31,
1997 1998
--------- ---------
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 390 $ 390
Accounts payable 4,629 4,528
Accrued liabilities 10,892 10,778
Customer deposits 688 781
--------- ---------
Total current liabilities 16,599 16,477
--------- ---------
NONCURRENT LIABILITIES:
Long-term obligations 48,799 43,799
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
13,243,448 and 13,308,480 issued and outstanding
in 1997 and 1998, respectively 133 133
Additional paid-in capital 105,079 105,445
Cumulative translation adjustment (1,197) (1,725)
Accumulated (deficit) earnings (56) 1,163
--------- ---------
Total shareholders' equity 103,959 105,016
--------- ---------
Total liabilities and shareholders'
equity $ 169,357 $ 165,292
========= =========
The accompanying notes are an integral part of
these consolidated balance sheets.
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
(In thousands, except per share amounts)
(UNAUDITED) (UNAUDITED)
1997 1998
--------- ---------
NET SALES $ 38,393 $ 36,279
Cost of sales 16,927 15,871
--------- ---------
GROSS PROFIT 21,466 20,408
OPERATING EXPENSES:
Research and development 2,784 2,768
Selling, general and administrative 16,679 14,882
--------- ---------
Total operating expenses 19,463 17,650
INCOME FROM OPERATIONS 2,003 2,758
Interest income 141 10
Interest expense (919) (874)
Other (expense) income, net (9) 10
--------- ---------
INCOME BEFORE INCOME TAXES 1,216 1,904
Provision for income taxes 425 685
NET INCOME $ 791 $ 1,219
========= ========
BASIC EARNINGS PER SHARE : $ 0.06 $ 0.09
========= ========
DILUTED EARNINGS PER SHARE : $ 0.06 $ 0.09
========== ========
Weighted Average Number of Shares of Common
Stock and Equivalents Outstanding
BASIC 13,241 13,308
--------- --------
DILUTED 13,664 13,725
--------- --------
The accompanying notes are an integral part of
these consolidated statements.
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Three Months Ended March 31, 1998
(In thousands)
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES 1997 1998
-------- -------
Net income $ 791 $ 1,219
Adjustments to reconcile net
income to cash provided by (used in)
operating activities:
Depreciation and amortization 2,151 2,169
Change in assets and liabilities:
Accounts receivable (1,253) 2,865
Inventories (2,513) (2,098)
Prepaid expenses and other assets (270) 1,854
Current liabilities (976) (122)
---------- ---------
Net cash (used in) provided by operating activities (2,070) 5,887
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities (17) (4)
Purchases of property, plant and equipment and other (1,429) (1,041)
--------- ----------
Net cash used for investing activities $ (1,446) $ (1,045)
--------- ----------
The accompanying notes are an integral part of
these consolidated statements.
CIRCON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Three Months Ended March 31, 1998
(In thousands)
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM FINANCING ACTIVITIES 1997 1998
------- -------
Proceeds from issuance of common stock $ 31 $ 366
Repayments of Capital lease obligations (59) -
Repayments of long-term obligations - (5,000)
Borrowings from long-term obligations 2,000 -
-------- --------
Net cash provided by (used in) financing activities 1,972 (4,634)
-------- --------
Cumulative translation adjustment (472) (528)
-------- --------
Net decrease in cash and temporary
cash investments (2,016) (320)
Cash and temporary cash investments, beginning
of period 6,234 3,660
--------- ---------
Cash and temporary cash investments, end of period $ 4,218 $ 3,340
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 828 $ 840
========= =========
Cash paid (refunded) for income taxes, $ 17 $ (833)
========= =========
The accompanying notes are an integral part of
these consolidated statements.
CIRCON CORPORATION
------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------
MARCH 31, 1998
--------------
(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
10-K 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.
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.
(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 March 31, 1998 consist of the following:
1997 1998
------- -------
Raw materials $ 8,559 $ 9,981
Work in process 18,309 18,923
Finished goods 11,621 11,683
------- --------
$ 38,489 $ 40,587
======= ========
(3) Long-Term Obligations
---------------------
Long-term obligations as of December 31, 1997
and March 31, 1998 consist of the following:
1997 1998
-------- --------
Revolving credit facility $ 46,000 $ 41,000
Industrial development
authority bonds due
December 2, 2006 3,165 3,165
Other 24 24
-------- --------
$ 49,189 $ 44,189
Less: current maturities (390) (390)
-------- ---------
$ 48,799 $ 43,799
======== =========
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 $66,000 at March 31, 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 March 31, 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 $4,482 as of
March 31, 1998.
Future principal maturities of the long term obligation are as follows:
1998 390
1999 405
2000 430
2001 41,450
2002 475
Thereafter 1,039
---------
$ 44,189
=========
(4) Comprehensive Income
--------------------
Components of other comprehensive income for the Company
consist of foreign currency items and that the amounts for the period
ended March 31, 1998 and accumulated to date are $528 and $1,725.
(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 March 31, 1998
Compared to Three Months Ended March 31, 1997
Sales
-----
First Quarter 1998 total sales were $36.3 million compared
to $38.4 million for the prior year. Total domestic sales were
$31.6 million, up from last year's $31.1 million. Sales by the U.S.
sales force totaled $28.3 million compared to $28.1 million last
year. International and other sales were $4.7 million compared
to $7.3 million in 1997.
International sales were down due to recent strengthening
in the U.S. dollar, reduced health care expenditures in Pacific Rim
countries, and the requirement by some European dealers for
CE marking, although not legally required until June 1998.
Virtually all of Circon's products received CE mark approval in April
1998. New higher performing and lower cost video systems and
other products have been recently introduced to international markets.
Gross Profit
------------
Gross profit as a percent of sales increased to 56.3% from
55.9% in first quarter 1997. This improvement is the result of
selling price stability and reduced manufacturing overhead, coupled
with manufacturing efficiency gains.
Operating Expense
-----------------
Operating expenses of $17.7 million are down $1.8 million or
9.3% from prior year. First quarter 1998 operating expenses were
48.7% of sales, down from 50.7% in 1997. This was due to the cost
reduction programs instituted over the past year.
Sales and marketing expenses have been cut 11% due to
reduced sales meeting expenses, tighter controls over field
inventory/samples, and general economics. General and
administrative expenses were down 9.8% for the quarter, due to
the closure of the German facility, reduced amortization, and
other factors. Research and Development expenditures of $2.8
million were level with prior year.
Income/EPS
----------
As a result of the factors discussed above, first quarter
operating income of $2.8 million increased 38% over prior year's
$2.0 million. Income before taxes of $1.9 million compared to
$1.2 million was up 57% and net income of $1.2 million was 54%
over prior year's $0.8 million. First quarter 1998 EPS was $0.09,
up from last year's $0.06.
Liquidity and Capital Resources
Circon's financial position remains strong with working capital
of $64.5 million. Circon's current ratio is 4.9:1.
For the quarter, borrowings decreased by $5.0 million.
Accounts Receivable decreased $2.9 million due to strong
collections and lower first quarter 1998 sales compared to
fourth quarter 1997.
Inventory increased $2.1 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 totaled $66.0 million at March 31,
1998. There is currently $41.0 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 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 vendors related to the year 2000.
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. 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. 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. The Company believes plaintiff's allegations
to be without merit and intends to vigorously defend the lawsuit.
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. The products to be used with the new
Transvaginal Hydrolaparoscopy procedure, for example, are currently
under review by the FDA and there can be no assurance that
approval to market the products will be forthcoming. 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 assess 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
May 15, 1998 /s/Richard A. Auhll
------------ -------------------
Date RICHARD A. AUHLL
President
Chief Executive Officer
May 15, 1998 /s/R. Bruce Thompson
------------ --------------------
Date R. BRUCE THOMPSON
Executive Vice President
Chief Financial Officer
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