-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OTaQ7cEO3eJGoJhK41VCFVmVa4fU66ZHGPD12N+UH/Q6CZUJnPeMZxGYtbdD/wyl tSHC5F/RKkcyFc/5T1ELRQ== 0000719727-97-000001.txt : 19970116 0000719727-97-000001.hdr.sgml : 19970116 ACCESSION NUMBER: 0000719727-97-000001 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19970115 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIRCON CORP CENTRAL INDEX KEY: 0000719727 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 953079904 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-12025 FILM NUMBER: 97506150 BUSINESS ADDRESS: STREET 1: 6500 HOLLISTER AVE CITY: SANTA BARBARA STATE: CA ZIP: 93111 BUSINESS PHONE: 8059670404 10-Q/A 1 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 CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) 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.
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 EX-27 2 ART. 5 FDS FOR 3RD QUARTER 10-Q
5 1,000 9-MOS DEC-31-1996 SEP-30-1996 10,988 1,636 25,993 1,965 33,874 83,126 90,695 37,398 170,851 20,033 0 0 0 132 95,684 170,851 115,393 115,393 51,260 59,864 3,283 0 3,251 (1,918) (2,757) 839 0 0 0 839 .06 .06
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