-----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, CdfR410z0zIBk8jCb9/YGnADmTc0WHrI0apf8b4xXZz//NLRRTdPzpe8nRoB1Wj5 6y8vRasVeUOGibH5HNnuHw== 0000719727-97-000002.txt : 19970401 0000719727-97-000002.hdr.sgml : 19970401 ACCESSION NUMBER: 0000719727-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12025 FILM NUMBER: 97571157 BUSINESS ADDRESS: STREET 1: 6500 HOLLISTER AVE CITY: SANTA BARBARA STATE: CA ZIP: 93111 BUSINESS PHONE: 8059670404 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 Commission file number 0-12025 CIRCON CORPORATION (Exact Name of Registrant as Specified in its Charter) Delaware 95-3079904 (State or Other Jurisdiction of (I.R.S. Eployer Incorporation or Organization) Identification No.) 6500 Hollister Avenue Santa Barbara, California 93117 (Address of Principal Executive Offices) (805)685-5100 Registrant's telephone number, including area code SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock ($.01 par value) (Title of class) 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 12 months; and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) The aggregate market value of the voting stock held by nonaffiliates of the Registrant was approximately $172,849,097 at March 11, 1997, when the closing sale price of such stock, as reported in NASDAQ National Market System, was $15.25. The number of shares outstanding of the Registrant's Common Stock, $.01 par value, as of March 11, 1997, was 13,243,090 shares. PART I Item 1. Business. On August 28, 1995 Circon Corporation completed a merger with Cabot Medical Corporation, creating the publicly-traded minimally invasive surgery company with the largest U.S. endoscopy market share in the fields of urology and gynecology. Circon operates its business through several divisions and subsidiaries including Circon ACMI, Circon Cabot, Circon Surgitek and Circon Video. Circon designs, manufactures, markets and services medical endoscope and electrosurgery systems for diagnosis and minimally invasive surgery. The Company's systems are used for a growing number of medical specialties, including urology, arthroscopy, laparoscopy, gynecology, thoracoscopy and plastic surgery. Circon also designs, assembles and markets miniature color video systems used with endoscope systems. In addition, the merger with Cabot Medical brought the capability to design, manufacture and market medical devices and systems for use in gynecological diagnosis and surgery, ureteral stents, urological diagnostic equipment and various products and systems principally used in general surgery. Minimally Invasive Surgery Minimally invasive surgery refers to surgical procedures which can be accomplished without a major incision or other traumatization to the patient, in some cases without general anesthesia. Endoscopy, which refers to the visualization of interior organs and tissues, is one of the most important minimally invasive surgical techniques. In addition to decreasing patient trauma and frequently avoiding general anesthesia, endoscopy can substantially reduce or eliminate postoperative hospitalization. The resulting cost savings and patient benefits have caused government reimbursement programs, as well as private insurance and prepaid health plans, to encourage the use of endoscopic procedures over traditional open surgery. Specialized endoscopes for various diagnostic and surgical procedures include laparoscopes (used for abdominal cavity surgery below the diaphragm), thoracoscopes (used for chest surgery above the diaphragm), ureteroscopes (used for urinary tract surgery), cystoscopes (used for surgery in the uro-genital tract) and arthroscopes (used for knee and other joint surgery). Endoscopic procedures are often televised using miniature video camera systems connected to the endoscope. The procedures are performed in hospitals, ambulatory surgical centers and physicians' offices. Medical Advantages The practice of endoscopy has expanded in recent years because it provides several medical advantages over traditional open surgery. Endoscopy: o results in less trauma to muscle and surrounding tissue, and minimal blood loss; o requires only a sedative or local anesthesia in some cases, rather than general anesthesia; o reduces postoperative patient discomfort, immobilization, hospitalization, recovery time and therapy; o lowers the risk of infection; and o minimizes scarring. Cost Advantages The medical advantages of endoscopy can produce important cost savings, particularly because endoscopy can reduce or eliminate postoperative hospitalization and, in procedures such as arthroscopy, rehabilitative therapy costs. For example, the removal of the gall bladder by conventional open surgery can require a period of approximately one week of postoperative hospitalization followed by four to six weeks for full recuperation. By comparison, laparoscopic cholecystectomy (removal of the gall bladder through a puncture in the navel using an endoscope) can reduce to one night or completely eliminate postoperative hospitalization. As a result, the overall cost of this procedure may be substantially reduced. For these reasons, government reimbursement programs, as well as private insurers and prepaid health plans, have generally encouraged the use of the endoscopy over traditional open surgery. Medical Applications Circon's endoscope systems and accessories are used in a growing number of medical specialties including urology, gynecology, laparoscopy, thoracoscopy, plastic surgery, athroscopy, gastroenterology and cardiology. In urology, the Company's endoscopes and video systems are used principally for diagnosis and surgery, while ureteral stents are used for post-operative care in the urethra, prostate, bladder, ureter and kidney. In gynecology, the Company's colposcope, cryosurgical and electrosurgical systems are used to diagnose and treat problems on the cervix and uterus; curettage systems are used to perform D&C procedures; and the Company's USA Resectoscope System is used to treat fibroid tumors and other uterine conditions, and for procedures that provide an alternative to hysterectomies. In laparoscopy, Circon's endoscope and video systems are being used to remove the gall bladder as well as to perform other procedures in the abdominal cavity; irrigation/aspiration systems are used to introduce sterile fluid to clean a surgical site and then remove the fluid, surgical debris, smoke, etc.; and the specialty disposables are used for rapid cauterization and cutting of tissue in a cost effective manner. In thoracoscopy, Circon's video hydro thoracoscope and Kaiser thoracoscopy instrument are inserted through small incisions between the ribs and are used to perform biopsies and other thoracic surgeries. In arthroscopy, Circon's video systems are used to televise surgery on the knee and other joints. In gastroenterology, the Company's endoscopic electro-surgery probes are used to cauterize ulcers and to perform biopsies and other diagnostic procedures and the Company has disposable specialty products for enteral feeding. In cardiology, Circon's mechanical endoscope subsystems are used with ultrasound equipment to make high resolution images of the heart from inside the body. Product Overview The Company manufactures a core product group which comprises the optical-video chain: o Rigid and Flexible Medical Endoscope Systems o Medical Video Systems o Electrosurgery Systems In addition, the Company manufactures cost-effective diagnostic products and disposable products for specific applications: o Ureteral Stents o Urinary Diagnostic Products o Gynecological Diagnostic Products o Cryosurgery Products o Tubal Ligation Products o Vacuum Curettage Products The Optical-Video Chain The optical-video chain combines a medical endoscope system with a medical video system and consists of an endoscope, a miniature color video camera, adapter optics, a high intensity light source, a fiber optic light cable, one or more video monitors and a video cassette recorder. This complete system allows the surgeon to perform the procedure viewing a magnified image of the subject organ or tissue on a video monitor, rather than directly through the endoscope eyepiece. Some procedures, such as arthroscopy or laparoscopic cholecystectomy, are performed almost exclusively using the video system. This technique, which has been made practical by the miniaturization of the color video camera so that it can be easily attached to an endoscope, provides the following benefits: o reduces surgeon fatigue by alleviating eye and back strain from prolonged viewing through the eyepiece of the endoscope; o increases operating room coordination, staff efficiency and motivation by allowing the entire operating room team to view the medical procedure and follow its progress; o allows more than one physician to participate in the procedure; o facilitates the teaching of medical students and practicing surgeons by permitting live viewing and playback; o provides documentation of surgery; and o increases patient education by allowing patients to view prior operations in order to understand the nature of proposed surgery. Circon offers customers the complete set of components which constitute the optical-video chain. In addition, the Company now provides the full range of products and accessories that a particular doctor, such as a urologist or gynecologist, might require to treat a patient, from the initial diagnosis through surgery to post-operative care. The Company believes that many customers prefer to purchase a complete system from a single source to simplify the purchasing decision and to allow the customer to look to a single company for servicing responsibility. Selling a complete system enables Circon to control overall quality of each link in the system and to reduce or eliminate its dependence on components outside its control. Additional advantages of a broad product line include greater efficiency in distribution and more flexibility in competitive pricing. Medical Endoscope Systems The Company manufactures a broad line of rigid and flexible endoscope systems and accessories. Rigid endoscopes transmit the optical image through a linear series of high resolution lenses encased in a stainless steel tube. Flexible endoscopes transmit the optical image through a coherent bundle of several thousand parallel optical fibers in a pliable tube. Both rigid and flexible endoscopes use fiber optics to illuminate the subject organ. Rigid endoscopes provide higher image quality than flexible endoscopes and, because they are less expensive to manufacture, most rigid endoscopes sell for significantly lower prices than flexible endoscopes. In addition, rigid endoscopes are more durable and more easily manipulated by the physician than flexible endoscopes. Flexible endoscopes have the advantage of greater patient comfort and can access certain areas of the body inaccessible by rigid endoscopes. The critical features that doctors require in an endoscope are high image quality (resolution, contrast, depth of focus, field of view and color fidelity), sufficient light intensity, evenly distributed illumination and ease of use. Doctors also require responsive service by the manufacturer. Circon believes that its products and service meet or exceed the industry standards. Medical Video Systems Circon designs, assembles and markets miniature color video systems for medical applications in endoscopy. The camera, a high intensity light source and optics, which are produced by Circon, typically account for 50% to 95% of the complete video system's retail price. Circon purchases and modifies video monitors, printers and video cassette recorders for resale as part of these color video systems. Color video systems range in price from approximately $10,000 to $30,000. The most important features of video cameras for medical applications are minimum size and weight, simplicity of operation, reliability, light sensitivity, image quality and immersibility. Circon believes that its cameras meet or exceed the quality of competitive cameras in each of these specifications. All of Circon's cameras use CCD sensors and are waterproof, which permits them to be immersed in disinfecting solution together with other surgical instruments. Circon manufactures camera models in both the NTSC (used in the United States and Japan) and PAL (used in much of Europe) electronic formats so that they are compatible with standard video accessories worldwide. In late 1992, Circon introduced the MicroDigital I medical video camera, the first single chip CCD sensor camera with all digital signal processing of video images. In early 1994, Circon began shipping the second generation Digital RGB Video Camera, the MicroDigital IV and in mid 1994, the MicroDigital III, a three chip camera, was introduced. The MicroDigital family of cameras' enhanced color and resolution greatly assists surgeons in properly diagnosing and performing surgery by optimizing their view of all anatomical structures and procedural instrumentation making it the ideal camera for minimally invasive surgical applications. Electrosurgery Systems Circon manufactures probes, electrodes and generators for use in procedures that utilize electrosurgery. Circon's monopolar electrosurgery equipment is used primarily in urological and gynecological procedures. Monopolar equipment passes electrical current from the electrode through the body to an external grounding pad and is very efficient for resection (cutting) and ablation (deep tissue cauterization). Circon also manufactures bipolar equipment used to control bleeding in the gastrointestinal tract. Unlike monopolar equipment, the Company's BICAP system passes electrical current only through a localized area around the probe tip. The isolation of the electrical current to the area of bleeding reduces collateral tissue damage. Circon manufactures BICAP probes for treatment of gastric ulcers and bleeding, esophageal tumors and hemorrhoids as well as other bi-polar instruments for cutting and coagulating tissue in urological, gynecological and pulmonary procedures. Primary Markets Urology. The Company believes that Circon ACMI products have the largest share of the urology endoscope market in the United States and more Circon products are in current use in that market than those of any competitor. Having the largest installed base is an important advantage when introducing new technology and products. The Company's urology products are used for diagnosis and surgery throughout the urinary tract including the urethra, prostate, bladder, ureter and kidney. The demand for ways of diagnosing and correcting medical problems associated with the urinary tract and the prostate has increased as the average age of the U.S. population has increased. In addition, the Company believes that the introduction of new products such as vaporizing electrodes, lasers and other new endoscopic urological instruments with features not found in older products coupled with the growing familiarity of urologists and the general public with these innovative endoscopic techniques are factors contributing to the growth of the urology market. Circon offers a comprehensive product line for the urology market place. The breadth of Circons urology products includes urodynamic equipment for diagnosing urinary problems, flexible scopes for examining the bladder and complete urinary tract, rigid scopes and accessories for correcting prostrate, bladder and kidney problems, as well as ureteral stents used to insure proper urine flow post-operatively. In 1988, Circon introduced the USA Series Resectoscope System, a rigid cystoscope system. This system incorporated new features and materials designed specifically for transurethral resection procedures used to treat enlarged prostate glands and to remove bladder tumors and strictures in the urinary system. The distinct features of the Circon USA system include a teflon-coated sheath design that reduces trauma to the patient's urethra and snap-in/snap-out locking components which simplify the assembly and disassembly of the system in the clinical setting. The ergonomic design of the USA Series Resectoscope also reduces physician fatigue during the approximately hour-long procedure. All components are solid stainless steel for improved durability rather than traditional chrome-plated brass. In early 1993, Circon introduced a continuous flow laser cystoscope system which expanded the USA Series product line and allowed lasers to be utilized along with the other USA Series products. In late 1993, Circon introduced the USA Elite System of resectoscopes and accessories and the new M3 Telescope line. This system combines the outstanding features of the USA System and the longest resectoscope currently available with the superior M3 optics. The price of a basic USA Elite Resectoscope System, including accessories, is approximately $8,000. Most recently, Circon revolutionized the treatment of BPH with the introduction of the VaporTrode Vaporization Electrodes, the VaporTome Resection Electrode and the Rotating Continuous Flow Resectoscope. The VaporTrode electrodes provide an outcome similar to TURP but with less bleeding, fewer complications and a shorter hospital stay. The VaporTome electrodes provide tissue resection similar to TURP with a deep coagulation zone for less bleeding. Circon also manufactures and markets the ACN-1 flexible cystoscope. Its primary advantages over the rigid cystoscope are patient comfort and 180 deflection capability, which allows the physician to examine the entire bladder using a single scope. Such examinations of the bladder require a minimum of three endoscopes be inserted and withdrawn when rigid cystoscopes are used. Greater patient comfort usually leads to better patient compliance for follow-up visits. The ACN-1 cystoscope can also be used as a flexible percatoneous nephroscope to remove stone fragments through a small puncture into the kidney. The flexible cystoscope is priced at approximately $7,200, while the price of a rigid cystoscope is about $3,400. Circon's AUR-8 flexible ureteroscope, introduced in 1989, is now part of a family of instruments which allow the urologist access to the entire urinary system. It was one of the first endoscopes providing access to the kidney via a body orifice with reduced trauma to the patient because of its relatively small diameter. The AUR-7 flexible ureteroscope which began to be delivered in the latter part of 1996 has a smaller outside diameter than the AUR-8, lessening the need for dilation and thereby further reducing patient trauma and shortening operative time. A large working channel allows surgeons to achieve diagnostic and therapeutic procedures. This product substantially reduces the need to perform kidney surgery through an incision in the patient's back. The price of this product is approximately $12,000. In December 1990, Circon began delivery of the Micro-6 semi-rigid ureteroscope, the first of the MR Series products which allows the surgeon to operate on the lower one-third of the ureter, which is where most kidney stone problems occur. The MR Series instruments allow the urologist to access the ureter without prior dilation, thus reducing operative time and patient trauma. It has become the Gold Standard facilitating ureteroscopic procedures for urologist. In 1993, Circon added the MR-9 semi-rigid ureteroscope with 5.4 and 2.1 French working channels for operating convenience, and the MR-PC, the smallest 2 channel pediatric cystoscope available. These products utilize flexible fiber optic imaging inside a long thin tube which resembles a large- diameter hypodermic needle. Circon's MR Series ureteroscopes have a dual channel feature. This allows the physician to utilize the endoscope as both a source of irrigation and as a means of access for surgical tools. The MR Series is essentially a rigid endoscope and is therefore easier to use than the more sophisticated flexible ureteroscopes. The MRO-6 and MRO-7 new offset ureteroscopes have straight working channels to accomodate mechanical and ultrasonic intracorporeal lithotriptors. The Company sells these products for approximately $7,000. Some of the most significant developments in urology in recent years have been in endourology, which has developed as an alternative to traditional open surgery for removal of kidney and ureter stones. Ureteroscopes and ESWL (extracorporeal shockwave lithotripsy) equipment are utilized, either separately or in conjunction with each other, to break up stones in the kidney and ureter. However, ESWL equipment is significantly more expensive than the Company's ureteroscopes and intracorporeal electrohydraulic lithotriptor and is not effective in certain circumstances, particularly when the stone is in the ureter rather than the kidney. Ureteroscopes, when used in conjunction with ESWL treatments, expedite the removal of stones from the kidney and ureter. The ureteroscope is used to further reduce the size of the stone fragments following the ESWL treatment and then to remove those stone fragments that are too large to pass comfortably through the urinary tract. Alternately, the ureteroscope may be used to perform the entire stone removal task if ESWL is not affordable or otherwise available. The MRO-20 Rigid Percatoneous Nephroscope, when used in conjunction with the USL-2000 Ultrasonic Lithotriptor (intracorporeal), removes stagborn calculi from the renal pelvis (kidney) in a single treatment versus multiple treatments required for ESWL. The MRO-20 sells for approximately $5,600 and the USL-2000 for approximately $15,000. The Circon Surgitek product line includes an array of complementary ureteral stents, urological diagnostic equipment and related products for use in urological procedures. Ureteral stents are used in urological surgical procedures to maintain dilation of the ureters and thereby aid fluid drainage from the kidneys. While usually inserted through cystoscopes, they may also be inserted intra- operatively. Indwelling ureteral stents are useful in helping to reduce complications and morbidity following urological surgical procedures. Ureteral stents are frequently used to aid drainage following an endoscopic or lithotripsy procedure and may also be used to help provide internal support of an anastomosis and prevent leakage of urine after surgery. The ureteral stent products are sold primarily to hospitals. The ureteral stent product line includes 16 types which are sold under the brand names Double J, Single J, Uro-Pass, Multi-Flo, Tractfinder, Magnetip, Uro-Guide, Magnetriever, Silitek, Surgitray, Lubri-Flex, Nephro-Stent, and Multi-Flex. Specialty guidewires are used in conjunction with the stent product line to ease access to the ureter and position a ureteral stent. The Lumina guidewire products feature radiopaque markings which allow for visualization and measurement of the ureter prior to stent placement, while Fastrac wires have a proprietary hydrophilic coating for easy and smooth introduction in difficult anatomy. Circon Cabot's Surlock Stone Retriever line consists of over 42 configurations of helical and flatwire stone baskets and pronged graspers to remove renal, ureteral and bladder stones. These products are introduced through a cystoscope or urethroscope and may be used in conjunction with extracorporeal shock wave lithotripsy treatment (ESWL). The Surlock line features a unique ergonomic locking handle design to aid in the retrieval of stones once they are captured. Circon Cabot's urological diagnostic products include urodynamic monitors and related ancillary equipment, including the recently introduced OM-4, used for functional testing of the bladder, urethra and sphincter. By measuring urine flow and concentration and muscle activity, urodynamic monitors provide data to aid the diagnosis of a variety of urological disorders. Endoscope attachments allow measurement to occur virtually anywhere within the urine collection system through the use of a procedure that may be performed in a physician's office. These products offer a wide variety of diagnostic testing functions, including carbon dioxide, water cystometry and uroflowmetry. Circon Cabot's Ultra monitor contains software for measuring, processing, recording and storing all test data required for a complete urodynamic evaluation, including data on flows and pressure. The Stand- Alone CMG unit provides the capability of the dual-channel cystometry necessary to diagnose incontinence and prescribe collagen treatments. Circon Cabot's urological diagnostic products are sold under the Endotek brand name primarily to physicians' offices and hospitals. Gynecology. Circon currently develops, manufactures and markets medical devices and systems for use in gynecological procedures. The products include tubal ligation systems, endoscopy systems, cryosurgical and electrosurgical systems, colposcopic equipment, curettage systems, hemorrhoid treatments systems and uterine resectoscope systems as well as disposable products used in conjunction with these systems. Colposcopes are optical diagnostic instruments used in gynecology to examine the cervix at high magnification to detect abnormal tissues which could lead to cervical cancer or other lesions. A range of instruments are offered which provide various magnification levels and documentation capabilities (35mm photography, Polaroid photography, videocolposcopy, etc.). Colposcopes are also used in conjunction with law enforcement efforts to diagnose and document evidence in rape and child abuse cases. The cryosurgical system is marketed principally to gynecology offices and clinics. The primary application is to precisely destroy defined areas of benign or pre-malignant lesions of the cervix. However, other medical specialties also use cryosurgery for dermatology, proctology, ophthalmic and other procedures. A cryosurgical system consists of a gas cylinder (usually nitrous oxide or carbon dioxide), a gun assembly, and special tips configured for the intended application. During cryosurgery, the tip is cooled by rapidly expanding gas to temperatures low enough to freeze abnormal tissues and destroy the lesion. Cryosurgery offers the advantage of less pain, faster healing, less scarring and faster and more cost-efficient treatment over conventional surgery procedures. The LLETZ (large loop excision of the transformation zone) system is a quick, simple economical electrosurgical treatment for cervical intraepithelial neoplasia which proceeds cervical cancer. The LLETZ electrosurgical procedure offers several advantages over other procedures including preservation of tissue for histopathological examination. The patented tubal ligation system, consisting of an applicator and the Falope-Ring Band, is used by the surgeon in conjunction with an endoscope system to locate the fallopian tubes and attach the bands for permanent female contraception. The Falope-Ring Band is a small silastic ring which, once properly attached to the fallopian tubes, occludes the tubes, preventing migration of the ovum to the uterus, thereby blocking fertilization and pregnancy. The Company's curettage system consists of a precision vacuum pump and associated controls along with disposable plastic tubing and cannula. It is used by gynecologists in hospitals and clinics to perform dilation and curettage and dilation and evacuation procedures. Hysteroscopes and Other Office Products Circon markets uterine resectoscopes to gynecologists for endometrial ablation and resection procedures. Endometrial ablation, the cauterization of the lining of the uterus, is a relatively new procedure offering an alternative to a substantial number of hysterectomy patients. Approximately 600,000 hysterectomies are performed annually in the United States. Endometrial ablations could be performed in approximately 30% of these cases on an outpatient basis, which generally takes less than one hour to perform and requires only a few days recovery time rather than several weeks with a hysterectomy. Circon products used in endometrial ablation include a specialized electrosurgical working element, a uterine resectoscope, and a color video camera with a high intensity light source. Circon's uterine video resectoscope system sells for approximately $30,000. Circon manufactures and markets other specially designed endoscopes called hysterscopes, in particular Micro-H hysterscopes, and accessories used in diagnostic and other gynecological procedures for both the hospital and the office environment. General Surgery/Laparoscopy. In late 1990, Circon introduced a complete line of medical instrumentation specifically designed to allow the general surgeon to remove the gall bladder endoscopically using a procedure called video laparoscopic cholecystectomy. The surgeon performs the procedure through small punctures in the abdomen through which specially- designed surgical instruments are inserted. This technique eliminates the need for a six to eight inch incision in the abdominal muscle which is required in traditional open surgery. While a conventional cholecystectomy generally requires a week of hospitalization and four to six weeks for full recovery, the laparoscopic procedure generally requires only one night of hospitalization and about a week for full recovery. Gall bladder removal is one of a growing number of traditional open surgical procedures which lend themselves to minimally invasive techniques. Other procedures include appendectomies, bowel resection, hernia repair and vagotomies. The laparoscopic instrumentation currently used for these procedures is the same as or similar to that used for gall bladder removal. Equipment offered by Circon for use in laparoscopic procedures include laparoscopes, flexible choledochoscopes, video systems, insufflators for inflating the abdominal cavity during surgery, electrosurgery systems and an array of specialized surgical instruments such as grasping forceps and dissecting scissors. A complete video laparoscopic instrumentation system for an operating room sells for approximately $40,000. During a laparoscopic surgical procedure, it is often necessary to withdraw a conventional laparoscope frequently in order to clean the lens. Circon's HydroLaparoscope addresses this problem of keeping the lens clean. It has a push-button lens cleaning design that provides clearer visualization of the operative site. The Company also manufactures surgical hand instruments and disposable products which, when used in conjunction with the laparoscopy system, cut and manipulate tissue, coagulate blood vessels and remove tissue during a procedure. In late 1993, Circon introduced the Snap-In Snap-Out line of reposable laparoscopic instruments, with multiple use disposable tips and reusable handles. These instruments are easily disassembled for cleaning and sterilizing, and the tips and handles can be interchanged to suit surgeon preference. Since the tips can be replaced instead of repaired when needed, the cost per use is lower. Circon Cabot's irrigation/aspiration systems consist of a series of pneumatically powered pumps which are coupled to a complete family of Corson or Surgiflex disposable suction/irrigation probes. These systems allow the surgeon to aspirate fluid, smoke, hard and soft tissue and irrigate with a variable, uninterrupted flow for rapid cleaning and removal of surgical debris, improving visualization of the surgical site during laparoscopic procedures. The Company also markets a line of cost-effective specialty disposable products. The recently introduced Seitzinger Tripolar Cutting Forceps eliminates the need for the more expensive stapling/cutting devices and provides for improved safety, efficiency and cost effectiveness in more advanced laparoscopic procedures. Other products include the Pleatman Sac Tissue Removal System for easy containment and removal of tissue in endoscopic procedures, Soft-Wand Atraumatic Balloon Retractor for improved safety and control during endoscopic retraction. Emerging and Other Markets Thoracoscopy. In 1992, Circon began to see increasing opportunity for using minimally invasive surgical techniques to perform surgery in the thoracic cavity. Circon's video hydro thoracoscope system with a push button lens cleaning design and line of sight irrigation capability are particularly advantageous in thoracic surgery due to the vascular structures typically involved. This unique and innovative product now provides consistent fog-free viewing by means of a proprietary distal lens warming feature. Circon recently began distributing a unique line of specialized manual instruments for thoracoscopy to compliment the existing video thoracoscopy system. Arthroscopy. Arthroscopy is joint surgery utilizing an endoscope called an arthroscope. This technique revolutionized knee surgery. Small scissors and other instruments are used to perform the arthroscopy through tiny incisions while the surgeon views the inside of the joint on the video monitor. Arthroscopy is usually performed in about one hour on an outpatient basis. Circon's complete optical-video system sells for approximately $16,000. Circon has been providing video camera systems for arthroscopy since 1974. Most of Circon's cameras sold for arthroscopic applications are used in arthroscope systems of other manufacturers. Gastroenterology. Circon's products for gastroenterology (GI) include video systems and bipolar and monopolar electrosurgery generators and probes. The Company's monopolar electrosurgery equipment is used with gastroscopes to take biopsies and remove polyps in the gastrointestinal tract. Circon's BICAP bipolar electrosurgery devices are used to control bleeding in both the upper and lower gastrointestinal tract, to cauterize ulcers and to treat hemorrhoids and esophageal tumors. The Company's BICAP hemostatic probe is designed to be used through a gastroscope. A complete BICAP electrosurgery system sells for approximately $10,000. The Company also markets a full line of products for enteral feeding of the GI patient. The Surgitek One-Step button is a proprietary product which allows for the placement of a low-profile button device at initial gastrostomy, thereby avoiding the cost and inconvenience of a second procedure. The Surgitek Button and Surgi-PEG devices provide a choice of treatment and tube options for pediatric and geriatric patients. Cardiology. Circon provides flexible mechanical endoscopy probes for use with ultrasonic transesophageal echocardiography equipment ("TEE") sold by other companies. In TEE procedures, the endoscopy probe containing an ultrasonic generator is inserted through the mouth into the esophagus, where it is used to generate images of the heart. This technology has gained rapid acceptance in the medical community because it provides better images of the heart function than conventional techniques. No market share data are available for TEE endoscopy probes. Non-Medical Markets Circon manufactures and distributes borescopes, video systems, specialty glass and other products for non-medical applications. Sales for these applications were about 1% of total sales in 1994, 1995 and 1996. Sales and Marketing Circon sells its endoscopy/urological products, video systems and primary care products to hospitals, surgi-centers, clinics and physicians' offices throughout the United States. These products are sold by a direct sales organization with 187 employee representatives, including 152 direct sales personnel, 19 region managers, 4 area managers, 4 national contract managers, 4 video specialists and 4 nurses. The domestic sales and marketing activities are supervised and supported by an in-house sales and marketing group, including telemarketing, of approximately 65 individuals. In international markets, Circon employs approximately 32 individuals and sells through 70 local dealers. The international organization includes 4 direct sales representatives in Canada. Circon's German subsidiary, Circon GmbH, has 14 employees including sales, service and support personnel. Circon France SA, Circons French subsidiary, has 5 sales representatives, a manager and two administrative support personnel. International sales are denominated in U.S. dollars except sales made by Circon GmbH which are denominated in German Marks. Circon bears the risk of currency exchange loss from German dealers although no material losses have occurred in the past. The key decision maker for most purchases of the Companys products is either the physician utilizing the equipment or the materials manager. The Company tends to reach these individuals through a combination of direct selling, national and regional group contracts, training seminars, telemarketing, advertising, direct mail and trade shows. Circon participated in approximately 350 exhibitions, workshops and conventions worldwide during 1996 in which the Company demonstrated endoscopes, urological stents, video camera products and primary care urodynamic products. Since 1988, Circon has been providing flexible mechanical endoscopy probes as an original equipment manufacturer to customers which are suppliers of components to manufacturers of trans-esophageal echocardiography equipment. Such sales are made directly by the Company rather than through the sales force. Circon sells its industrial products through independent sales representatives supported by a sales manager. Miniature hardware and MicroTools are sold through the mail directly to end users and through catalog dealers. The Company maintains a specialized sales force for Endotek Urodynamic products which utilizes approximately 30 independent representatives and sales organizations who devote a substantial portion of their time to selling the primary care, cryosurgery and electrosurgery products. The Company has established and maintained long-term relationships with faculty members of leading medical schools as well as with leading surgeons and endoscopists throughout the world. The Company's manage- ment, direct development and marketing personnel periodically meet with these faculty members, corporate advisors and practitioners at hospitals, clinics, company facilities, teaching seminars and trade shows. Intensive concentra- tions occur with regard to new or planned products within the specialist's particular area of interest. These relationships have provided information concerning practitioners' needs as well as valuable marketing contacts and goodwill. In addition, working with leading practitioners of medical skills in new product development is a source of product innovation. The majority of the Company's sales are to repeat customers. Circon typically ships hardware products within 30 days of receipt of a firm purchase order and disposable products within 48 hours of order. Accordingly, the Company does not believe that backlog is a reliable indicator of future sales for any fiscal period. Research and Development The medical endoscope and video system businesses have seen numerous continuing engineering innovations. Circon believes that its ability to apply technical innovations quickly to products designed for specific medical applications has been and will continue to be important to its success. Expenditures for research and development were $12,676,000, $11,393,000 and $11,896,000 in 1994, 1995 and 1996 respectively. During 1995 and 1996, Circons development efforts were directed toward expansion of the endoscope product line for gynecology, office hysteroscopy, a new flexible cystoscope and ureteroscope, and new alternative versions of the VaporTrode electrode for urology. Endovideo product development concentrated on a new digital camera platform with enhanced performance and user-controlled features. The Company has continued to develop cost-effective procedure-based disposables such as the 5mm Tripolar Cutting Forceps, new ureteral stents, electrosurgical/suction irrigation products and a new fluid management pump for hysteroscopy. Manufacturing and Service Circon manufactures entire endoscope systems, using proprietary technologies and exacting quality assurance. Lens assemblies are manufactured from blocks of optical glass, some of which the Company manufactures from raw silica. Glass fibers are drawn using advanced "3G" or "glass on glass" processes. The Company has developed, refined and automated the technology required for grinding and polishing large quantities of lenses and prisms having dimensions and radius of curvatures less than one millimeter. These lenses and prisms are used in the manufacturing of high performance small diameter flexible endoscopes. A key component in lens manufacturing is the application of appropriate coatings to the surfaces of each lens, using state-of-the-art vapor deposition equipment. In addition, the Company manufactures endoscopic video systems, electro-surgical generators and electrodes required for electrosurgical procedures. Most components used in the manufacturing of video and electrosurgical devices are bought from outside suppliers to Circon specifications. Some components, including certain sensors and cables, are currently purchased from a single source. The loss of any single source of supply would have no more than a temporary effect on the Company's operations. The Company's manufacturing organization follows good manufacturing practices within the FDA's regulated guidelines. At the same time, quality assurance consistently strives for worldclass standards per ISO 9000 regulations. In 1996 the Racine facility became ISO 9001 certified. Service and Repairs The Company provides a two-year warranty on endovideo systems sold in the United States. Most endovideo system repairs are performed by the Company in Santa Barbara, California within 24 hours of receipt. For repairs requiring more than 24 hours, loaner systems are provided to the customer. The Company also provides service and ongoing maintenance to customers with video equipment that is no longer under warranty. European repairs are handled through Circon's GmbH repair facility located in Tauffkerchen near Munchen, Germany. All endoscope repairs are performed in Stamford, Connecticut and Norwalk, Ohio. For rigid out-of-warranty endoscopes and other equipment repairs or service, the Company offers a repair exchange instrument typically in less than 48 hours for a fee well below the cost of a new instrument. Patents and Trademarks While the Company holds numerous patents covering certain aspects of its endoscope, video, electrosurgical, silicone stent and accessing technology, it does not believe that its business is materially dependent on any single patent or license. The Company utilizes several trademarks, including "Circon", "ACMI", "BICAP", "Cabot" and "Surgitek". Government Regulation and Reimbursement Programs The medical devices manufactured and marketed by the Company are subject to regulation by the FDA as well as state and foreign regulatory agencies. Depending on the classification of medical device, different levels of regulation apply, ranging from extensive premarket testing and approval procedures for Class III devices, such as implantable devices, to substantially lower levels of regulation for Class II devices, such as endoscopes, and Class I devices, such as video cameras. Currently, most of the Company's products are Class I or II. Some of the Company's new products require premarket notification to the FDA under an expedited procedure known as 510(K) that is available only for products which are substantially equivalent to a device which was on the market prior to May 28, 1976. If the FDA rejects the Company's claim that there was such a substantially equivalent product, FDA premarket approval involves a procedure requiring extensive clinical testing, additional cost and substantial delay in the introduction of the product to market. FDA and state regulations also require adherence to certain "good manufacturing practices" ("GMP") which mandate detailed quality assurance and record-keeping procedures, and the Company is subject to unscheduled periodic regulatory inspections. The Company has on two occasions in 1992 and 1993 received FDA "regulatory letters" notifying the Company of deficiencies and warning of enforcement action if the deficiencies were not corrected. The Company believes that the deficiencies, which both related to inadequate documentation of compliance with GMP, have been corrected and that it is in substantial compliance with GMP regulations. The system for Medicare reimbursement of hospital expenses is based on the diagnosis of the patient. Under this Diagnostic Related Groups ("DRG") system, a hospital is paid a fixed amount for admitting a patient with a specific diagnosis according to a schedule of fees, regardless of the hospital's actual costs of treating the patient. Whether or not the DRG reimbursement is sufficient to cover the hospital's costs in a particular case, the ceiling on reimbursement may provide an incentive to reduce such costs. To the extent that the DRG program, and similar programs of private insurers, provide such an incentive, the Company believes that they promote the use of minimally invasive diagnostic and surgical procedures such as endoscopy which reduce postoperative hospitalization costs. The Company is unable to predict whether future changes to reimbursement or other healthcare reform efforts will materially affect sales of the Company's products. Competition As a result of the merger with Cabot, Circon has the largest U.S. sales force of any minimally invasive surgery company in the fields of urology and gynecology. Circon ACMI is the leader in urology and gynecology hardware products such as endoscopes and video systems. Circon Cabot is one of the leading companies in the U.S. in disposable products such as urological stents, laparoscopic suction-irrigation devices, and a wide variety of gynecology products. Circon believes that its products have the largest share of the urology endoscope market in the United States. Major competitors in endoscopic markets include a Japanese company (Olympus Optical Co. Ltd.) and two German companies (Karl Storz GmbH and Richard Wolf GmbH). These companies, as well as Stryker Corporation and Dyonics (an affiliate of Smith & Nephew plc), are the principal competitors in the miniature medical color video camera market and hold a larger share of the International market than Circon. The urology market is relatively mature and dominated by a small number of competitors. The principal competitive factors are product quality and reliability, product features, innovation and service. The Company believes that it competes favorably with respect to each of these factors. The color video camera market is somewhat more fragmented than the urology market, although some camera producers sell products only for specific medical specialties. The principal competitive factors are image quality, minimum size and weight, simplicity of operation, reliability, light sensitivity and immersibility. The Company believes that it competes favorably with respect to each of these factors. The gynecology market is a rapidly growing area in which Circon has substantial presence. With the addition of Cabot's line of specialty office and disposable products to Circon's hysteroscopy products, the Company is well positioned with respect to competition and provides a complete array of products. The emerging endoscope markets are highly fragmented and market shares are indeterminate. The principal competitive factors are product features, price and service. The Company believes that it competes favorably with respect to each of these factors. An additional competitive factor in the urology, laparoscopy and gynecology fields is breadth of product line. Circon now offers a complete range of diagnostic, therapeutic and post-operative products for the urology, laparoscopy and gynecology markets. Companies with broad product lines have certain selling advantages. The Company believes that many customers prefer to purchase a complete video-endoscope system from a single source to simplify the purchasing decision and to look to a single company for servicing responsibility. Additional advantages of a broader product line are greater efficiency in distribution and more flexibility in responding to competitors' price cuts offered on a single component of the system. Some surgical procedures which utilize the Company's products could potentially be replaced or reduced in importance by alternative medical procedures or new drugs. The Company's Resectoscope Systems are used to perform transurethral resection of the prostate ("TURP") to treat benign prostatic hyperplasia ("BPH"), a condition in older men where the enlarged prostate gland restricts urination. Alternative procedures, new devices and certain drugs now undergoing testing and evaluation may alleviate BPH or its symptoms or delay the need for TURP. Since 1992 Merck & Co., Inc. has been marketing a drug that, according to clinical testing reported by the pharmaceutical company, caused the prostate gland to stop growing in most cases, to shrink in some cases, and to restore urine flow to near-normal rates in some cases. Abbott Laboratories, Inc. and Pfizer, Inc. also have drugs which are FDA approved for treatment of hypertension and for treatment of BPH. High percentages of patients using these drugs are reported to be showing some levels of symptomatic improvement. Alternative procedures under evaluation include implantation of a stent (metal coil) in the prostate to provide mechanical relief from pressure on the urethra, and hyperthermia to shrink the prostate using microwave probes inserted rectally or urethrally. Another procedure under evaluation uses a laser probe inserted in the urethra to treat the prostate. Circon is unable at this time to assess the efficacy, safety, cost effectiveness, physician acceptance and potential regulatory approval of these new drugs, modalities and alternative medical procedures. To the extent that any of them significantly reduces the need for Circon's products, sales of the Company's products could be adversely affected. The markets in which the Company's products compete are characterized by continuing technical innovation and competition. In order to continue to be competitive, the Company is engaged in continuing efforts to improve its products and to develop additional products. There is no assurance that competition will not further intensify, either from existing competitors or from new entrants into the markets, or that some future medical breakthrough or technological development will not confer a competitive advantage on another company. Employees As of December 31, 1996, the Company had 1,177 full-time employees, of whom 655 were engaged in manufacturing, 132 in research and develop- ment, 296 in sales and marketing and 94 in administration. Approximately 365 employees are covered by collective bargaining agreements. The Company's collective bargaining agreements covering union workers expire in March 1998 and January 1999. The Company has not experienced any strikes or other work stoppages in recent years. Forward Looking Statements The information provided in this report may contain forward looking statements or statements which arguably imply or suggest certain things about the Companys future. These statements are based on assumptions that the Company believes are reasonable, but a number of factors could cause the Companys actual results to differ materially from those expressed or implied by these statements. These include, but are not limited to, statements about: 1) sales increase, particularly in the case of the U.S. sales force; 2) the continuing improvement of the productivity of the U.S. sales force; 3) anticipated synergies or cost savings to be realized as a result of the merger with Cabot or other cost saving initiatives; and 4) the anticipated success of certain recently introduced products or products scheduled to be released in the near future. Item 2. Properties. Circon currently owns or leases a total of approximately 500,000 square feet of office and manufacturing space in eight locations. The Company is headquartered in Santa Barbara, California where it owns a 76,000 square foot facility used for administration and manufacturing. The Company currently sublets 23,000 square feet of the building. The Company owns 29 acres of land and 52,000 square feet of manufacturing space in Norwalk, Ohio. The Company also leases and occupies 14,000 square feet of manufacturing space in Norwalk. The Company leases and occupies 98,000 square feet of office and manufacturing space in a 150,000 square foot building in Stamford, Connecticut. In 1995, the Company negotiated to sublease 47,000 square feet of this facility. The sublease expires in June, 1997. The Company owns two buildings situated on 23 acres in Racine, Wisconsin: (1) a 73,000 square foot building used as a manufacturing and warehousing facility; and (2) a 36,000 square foot building used as an engineering and administrative facility. The Company owns two 41,000 square foot buildings in Langhorne, Pennsylvania, which were previously used as administrative, manufacturing, engineering and warehousing facilities. Both properties have been leased and the manufacturing operations have been relocated to the Norwalk, Santa Barbara and Racine facilities. The Company leases and occupies 6,000 square feet of office and manufacturing space in two buildings located in Windsor, Ontario, Canada. The Company leases and occupies approximately 4,000 square feet of office and repair space in Munich, Germany. The Company also leases and occupies approximately 3,500 square feet of office space in Paris, France. Item 3. 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 Companys 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 state- ments 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. 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 mended 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 Circons stockholders by taking steps to resist U.S. Surgicals hostile tender offer. The Company and its officers and directors filed an answer to the complaint on November 12, 1996. The Company believes plaintiffs allegations to be without merit and intends to vigorously defend the lawsuit. Item 4. Submission of Matters to a Vote of Security Holders. None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters. Circon's Common Stock is traded in the over-the-counter market and is quoted through the National Association of Securities Dealers Automated Quotation System under the NASDAQ symbol "CCON." The following table shows the actual closing prices of the Company's Common Stock quoted on the NASDAQ National Market System. High Low ------ ------ 1995: First Quarter 19-1/2 11-3/4 Second Quarter 23-1/4 16 Third Quarter 21 17 Fourth Quarter 23-1/2 18 1996: First Quarter 20-1/4 10-3/4 Second Quarter 15-5/8 10-3/4 Third Quarter 19-1/2 8-1/2 Fourth Quarter 17-5/8 15-1/4 As of December 31, 1996, the Company had 1,052 shareholders of record. No dividends have been paid by Circon and it is not anticipated that any will be paid in the foreseeable future. ITEM 6. SUMMARY FINANCIAL INFORMATION (in thousands, except per share data) Circon Corporation and Subsidiaries For the years ended December 31, ------------------------------------------ 1992 1993 1994 1995(A) 1996 ------- ------- ------- -------- ------ Income Statement Data: Net Sales $138,481 $156,861 $157,041 $160,447 $153,779 Gross Profit 73,294 80,972 88,569 83,640 85,878 Operating Income (Loss) 8,238 (1,454) 13,753 3,820 6,709 Net Income (Loss) 4,386 (6,212) 6,509 (5,393) 2,071 Net Income (Loss) per Share 0.35 (0.50) 0.51 (0.41) 0.16 Fully Diluted Net Income (Loss) per Share 0.35 (0.50) 0.51 (0.41) 0.16 Weighted Average Shares Outstanding 12,525 12,418 12,738 13,237 13,339 Fully Diluted Weighted Average Shares Outstanding 12,525 12,418 12,739 13,332 13,350 December 31, -------------------------------------------- 1992 1993 1994 1995 1996 -------- --------- -------- ------- ------- Balance Sheet Data: Working Capital $77,346 70,857 70,811 $55,365 $61,261 Total Assets 183,648 177,301 184,129 181,399 169,118 Total Debt 74,209 74,184 73,483 72,292 50,935 Total Shareholders' Equity 89,941 81,768 86,965 87,172 98,901 No cash dividends have been paid during the periods presented. (A) See Note 3 to the consolidated financial statements Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. See "Additional Cautionary Statements" regarding forward looking statements contained in the following discussion. Results of Operations Overview 1996 was a year of transition and challenge for Circon. Faced with the task of integrating and increasing the productivity of the sales forces of Circon and Cabot in an effort to fully realize the projected benefits of the merger of the two entities, the Company was distracted by an unsolicited tender offer to acquire the outstanding common stock. Despite the difficulties caused by this offer, the Company believes it is beginning to realize the benefits of the contemplated synergies of Circon and Cabot. The Cabot merger positions Circon to benefit from the current U.S. healthcare trends toward providing lower cost solutions to the medical problems of an aging population. The Company has now gained the critical mass and broader product line needed to better serve the larger hospitals and buying groups. Circon has gained market share in urology, gynecology and general surgery due to Cabot's strength in these markets. Circon and Cabot had been selling different products to the same doctors. The doubling of the force substantially reduces travel time and increases productive selling time for each sales representative which enables them to better service their customers. The elimination of duplicative marketing programs, administrative functions and manufacturing overhead should result in higher profit margins. Comparison of the Year Ended December 31, 1996 to the Year Ended December 31, 1995 Sales Sales increased sequentially during the last three quarters of 1996 to total $153.8 million, but remained below the 1995 sales of $160.4 million due to declines in the international and other sectors. U.S. Sales force sales totalled $118.5 million in 1996 and represented 77% of total sales. During the seven months transition period immediately following the merger, the newly combined U.S. sales force had uneven performance. However, from the second quarter through the fourth quarter, U.S. sales force revenues have grown sequentially. Circon's U.S. sales force increased its fourth quarter sales by 10% over the comparable 1995 period and achieved the highest sales of any quarter since the merger. Circon utilizes specialized distributors in most countries; however, late in the third quarter 1996, a Circon direct sales force was established in France. Fourth quarter sales results were encouraging and the French sales organization should become productive in 1997. International sales of $22.1 million were down $4.1 million or 15.6% compared to 1995 primarily due to large initial orders from our new Japanese distributor which occurred in 1995. Several new products began shipping in the fourth quarter, most notably the AUR-7 Flexible Ureteroscope which is the smallest diameter instrument of its type in the world. Numerous other products are targeted for release in 1997. Gross Profit The 1996 gross profit percentage of sales was 55.8% compared to 54.8% for 1995. Gross profit for the first nine months was 55.6% of sales compared to 54.6% of sales for the same 1995 period due to increased manufacturing efficiencies and some stabilization in pricing of Cabot products. Cabot Medical's facility in Langhorne, Pennsylvania was closed at the end of October. The full benefit of the closure will begin in the first quarter 1997. As a result of the Langhorne closure and other measures, fourth quarter gross profit as a percent of sales reached 56.6%, up from 55.4% for the same 1995 period. Operating Expenses Selling, general and administrative expenses were up less than one percent year to year. Reduced marketing expenses achieved through the synergies of the Cabot merger were offset by increased sales incentives for the U.S. sales force, higher recruiting expenses due to the sales force restructuring, and higher legal fees. Research and development expenditures for 1996 totalled $11.9 million, up 4.4% over the combined 1995 expenditures of $11.4 million, and were 7.7% of sales. Development efforts focused on new flexible endoscopes, new video cameras and fluid management systems. Fourth quarter operating expenses were $19.3 million, up 3.3% over the combined fourth quarter 1995. A special business integration charge of $4.2 million, associated with merging Circon and Cabot, was included in 1995 operating expenses. A charge of $2.6 million incurred in connection with the closing of the Langhorne facility was included in 1996 operating expenses. Interest and Other Income (Expense) In 1996 the Company retired $67.0 million of Cabot's convertible notes utilizing $50.5 million of a new credit facility plus cash and marketable securities. Therefore, interest income of $0.4 million in 1996 declined compared to $1.3 million in 1995 and interest expense decreased from $5.9 million in 1995 to $4.2 million in 1996. A special non-operating charge of $3.0 million associated with the U.S. Surgical hostile tender offer and shareholder lawsuits is included in the 1996 results. A special charge of $4.9 million for the fees and other one-time expenses associated with the Cabot merger is included in the 1995 results and classified as non-recurring transaction costs. Income Excluding one-time charges, 1996 income before taxes was $5.6 million compared to $7.4 million for 1995, primarily due to lower sales. Net income for 1996 was $5.7 million excluding special charges of $5.6 million pretax and $3.7 million after taxes. Including the special charges, 1996 net income of $2.1 million was the result of the factors discussed above offset by a non-recurring income tax benefit of $2.0 million. Comparison of the Year Ended December 31, 1995 to the Year Ended December 31, 1994 In this discussion "combined" presents Circon and Cabot for all prior periods as if they had always been merged which is required under the pooling of interests accounting rules. However, where appropriate, to clarify operating trends, the two companies will be discussed separately and indicated by the terms "Circon" and "Cabot." Sales Combined sales for 1995 totalled $160.4 million, up 2% over 1994. The 23% increase in combined international sales was offset by a 1% decrease in combined U.S. sales. Management targeted improving sales growth in international markets as a major 1995 objective. A new Circon distribution agreement in Japan, which included significant initial orders, coupled with excellent worldwide reception given the Company's new urology and gynecology products, resulted in excellent international sales growth throughout 1995. Circon's total sales were up over 14% during the first nine months in 1995 due in part to the excellent reception of Circon's new VaporTrode Vaporizing Electrode and Continuous Flow Rotating Resectoscope system. Pricing pressures on Cabot's disposable products coupled with the disruption caused by Cabot's integration of its endoscopy and urology sales forces during the first part of 1995, caused Cabot's sales decline of 4% during the first nine months. In the fourth quarter combined international sales were up 10%, however, the combined U.S. sales force sales were down 10% as a result of the reorganization of the entire U.S. sales force due to the merger of Circon and Cabot. During the fourth quarter every U.S. sales representative had to penetrate a new geographical-customer base and simultaneously learn entirely new products representing about 50% of their total sales. Gross Profit The 1995 combined gross profit percentage was 54.8% of sales compared to 56.4% for 1994. The second half of 1995 gross profit percentage improved to 55.5% from 53.9% in the first half. Circon's gross profit was up 18% during the first nine months in 1995 and totalled 54.3% of sales due to increased sales of VaporTrode and related products which carry higher profit margins. Cabot's gross profit was down 14% during the first nine months of 1995 and totalled 54.9% of sales due to lower prices on Cabot disposable products as well as shifts in sales mix. In the fourth quarter, the combined gross profit improved to 55.4% of sales, up from the comparable 1994 period. There was a special charge in the third quarter of 1995 of $4.2 million in cost of sales to write off inventories of duplicative products and excess manufacturing equipment as a result of the merger. Operating Expenses Combined selling and administrative expenses increased $2.1 million to $64.2 million for the full year 1995, but were down $0.7 million in the respective fourth quarters. The 14% increase in Circon sales caused higher commission expense, and promotional expenses associated with the introduction of the VaporTrode Vaporizing Electrode and the Continuous Flow Rotating Resectoscope resulted in higher sales and marketing expenses during the first nine months of 1995. Cabot's sales and marketing expenses increased due to additional expenses related to integrating and training their endoscopy and urology sales forces during the first part of 1995. Post merger combined selling and administrative expenses declined $0.5 million in the fourth quarter as some of the duplicative expenses between the two companies were eliminated. Combined 1995 research and development expenses dropped $1.3 million to $11.4 million, yet were 7.1% of combined sales. The majority of the R&D expense decrease was due to the elimination of redundant positions when Cabot's R&D functions were consolidated into the Langhorne, Pennsylvania, facility in early 1995. Fourth quarter 1995 combined operating expenses were $18.7 million, down $0.7 million or 3% from the fourth quarter 1994. A special business integration charge of $4.2 million associated with merging the two companies was part of operating expenses in the third quarter. These merger expenses related to reorganizing, cross training and providing the requisite demonstration equipment for the U.S. sales force. Combined operating expenses for 1995, excluding the business integration expense, increased $783,000 or 1% over the comparable 1994 period, but were 47% of sales compared to 48% of sales for the 1994 period. Interest and Other Income (Expense) Interest income totalled $1.3 million in 1995 compared to $0.9 million in 1994. The increase resulted from higher rates of return on investments. Interest expense totalled $5.9 million in 1995 compared to $6.0 million in 1994. Other expense increased in 1995 primarily due to higher franchise taxes. The special charges of $4.9 million reflect fees and other one-time expenses specifically associated with the Cabot merger and are classified as non-recurring transaction costs. Income Circon's income before taxes increased substantially during the first half of 1995, up 42% in the first quarter and up 107% in the second quarter, as a result of sales growth and margin improvements. As noted above, most of Circon's gains were offset by Cabot's transitional problems during the first half 1995. Excluding these one-time charges, combined 1995 income before taxes totalled $7.4 million, down $1.1 million from 1994, due to lower gross profit and slightly higher operating expenses discussed above. The $6.0 million combined net loss before provision for income taxes in 1995 resulted from the special business integration and non-recurring transaction costs associated with the Cabot merger of $13.4 million. Combined net income from operations was $4.4 million, excluding special charges of $13.4 million pretax and $9.8 million after taxes. A 1995 net loss of $5.4 million was the result of the factors discussed above partially offset by an income tax benefit of $574,000. Liquidity and Capital Resources - ------------------------------- Circon's financial position remains strong with working capital of $61.3 million, including $6.2 million of cash and equivalents. Circon's current ratio is 4.1:1. On December 31, 1996, Circon had a $75.0 million secured revolving credit line with a syndicate of bank's. Interest on this credit line is indexed to either LIBOR or the banks base rate at Circon's option. Circon also has a letter of credit totalling $5.3 million underlying $7.0 million of the tax exempt Cabot Industrial Development Authority Bonds. The letter of credit has a renewable five year term and carries an annual fee of 1% of the outstanding bond principal facility. In 1996, Circon repurchased at par the $67.0 million of Cabot's 7.5% convertible notes pursuant to a November 1995 vote of the bond holders. $50.5 million of Circon's credit facility was used to purchase the Cabot notes. As a result, cash and temporary investments dropped $11.4 million year to year and total debt went down $21.4 million. Net cash flows from operating activities totalled $1.25 million, primarily due to $8.6 million of depreciation and amortization being partially offset by changes in other assets and liabilities. Inventories increased $3.5 million due to a build-up for the transition of products to other manufacturing locations as a result of closing the Langhorne facility, and introductions of new products. Property, plant and equipment increased $6.3 million due in part to additional sales demonstration equipment, the conversion to a new MIS system and the buildout of the Santa Barbara facility. Cash flow of $7.9 million resulted from the exercise of stock options. Combined non-cash charges for depreciation and amortization aggregated $29.7 million over the three year period 1994 through 1996, and $28.2 million was used to purchase plant and equipment net of retirements (see consolidated statement of cash flow and related notes in the accompanying financial statements). The company believes that cash flows from operations, existing cash, marketable securities, and cash available from bank credit arrangements are adequate to fund the company's existing operations for the foreseeable future. Additional Cautionary Statements - -------------------------------- Management's Discussion and Analysis contains forward looking statements relating to benefits of the Circon-Cabot merger, including programs to reduce production costs and marketing and administrative expenses and to increase sales productivity. Those statements are subject to various risks and uncertainties, and actual results could differ materially. Some of the factors that could affect the actual results are discussed below. Circon acquired Cabot Medical Corporation ("Cabot") by merger (the "Merger") in August, 1995 with the expectation that the Merger will result in beneficial synergies and cost savings for the combined Company. Critical to the realization of the benefits of the Merger is the complete and successful integration of the Companies. Although the integration is substantially underway, several important steps are still in progress. There can be no assurance that these steps will be completed and result in the expected benefits and synergies. Following the Merger, the Company had to cross train both former sales forces to sell the medical devices carried by the other. Although some sales personnel have produced significantly increased sales, others have experienced significantly lower sales productivity. The failure of the bottom tier of the sales force to grow sales could adversely impact the sales synergies the Company realizes as a result of the Merger. In addition, the closure of the Langhorne facility involved organizational changes or shifts in employee responsibilities, as well as other factors, that have resulted and may continue to result in the loss of the services of qualified employees, some of whom might be difficult to replace. The transfer of products previously manufactured in Langhorne to other facilities may lead to additional costs and expenses that are currently not anticipated. Failure to effectively absorb the Cabot product line and replace former key Cabot employees could also result in the expected cost savings and sales synergies not being realized. Disruptive Effect of Hostile Tender Offer On August 2, 1996, a subsidiary of United States Surgical Corporation initiated an unsolicited offer to purchase all outstanding shares of the Company's Common Stock. This tender offer has had, and may continue to have, various adverse effects on the Company's business and results of operations, including the increased susceptibility of key employees of the Company to employment offers by other companies, the risk of negative reactions among distributors, suppliers or customers to the prospect of such a change in control of the Company, the distraction of management and other key employees and the fees and other expenses of financial, legal and other advisors to the Company in responding to the tender offer and related law suits. Increasing Competition and Risk of Obsolescence from Technological Advances The markets in which Circon's products compete are characterized by continuing technical innovation and increasing competition. Some surgical procedures which utilize the Company's products could potentially be replaced or reduced in importance by alternative medical procedures or new drugs which may adversely affect Circon's business. Government Regulation The process of obtaining and maintaining required regulatory approvals is lengthy, expensive and uncertain. Although Circon has not experienced any substantial regulatory delays to date, there is no assurance that delays will not occur in the future, which could have a significant adverse effect on Circon's ability to introduce new products on a timely basis. Regulatory agencies periodically inspect Circon's manufacturing facilities to ascertain compliance with "good manufacturing practices" and can subject approved products to additional testing and surveillance programs. Failure to comply with applicable regulatory requirements can, among other things, result in fines, suspensions of regulatory approvals, product recalls, operating restrictions and criminal penalties. While the Company believes they are currently in compliance, if Circon fails to comply with regulatory requirements, it could have an adverse effect on Circon's results of operations and financial condition. Uncertainties within the Healthcare Markets Political, economic and regulatory influences are subjecting the healthcare industry in the United States to rapid, continuing and fundamental change. Although Congress has failed to pass comprehensive health care reform legislation to date, Circon anticipates that Congress, state legislatures and the private sector will continue to review and assess alternative health care delivery and payment systems. Responding to increased costs and to pressure from the government and from insurance companies to reduce patient charges, healthcare providers (including customers of Circon) have demanded, and in many cases received, reduced prices on medical devices. These customers are expected to continue to demand lower prices in the future. Circon cannot predict what impact the adoption of any federal or state 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 maintains product liability insurance at coverage levels which they believe are adequate, there is no assurance that, if the Company were to incur substantial liability for product liability claims, insurance would provide adequate coverage against such liability. New Products Circon's growth depends in part on its ability to introduce new and innovative products that meet the needs of medical professionals. Although Circon has historically been successful at bringing new products to market, there can be no assurance that Circon will be able to continue to introduce new and innovative products or that the new products that Circon introduces, or has introduced, will be widely accepted by the marketplace. The failure of the Company to continue to introduce new products or gain wide spread acceptance of a new product could adversely affect the Companys operations. ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA Report of Independent Public Accountants Consolidated Financial Statements: Balance Sheets - December 31, 1995 and 1996 Statements of Operations for the years ended December 31, 1994, 1995, and 1996 Statements of Shareholders' Equity for the years ended December 31, 1994, 1995, and 1996 Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 Notes to Consolidated Financial Statements (All other schedules are omitted because they are not applicable, not required or the information required to be set forth therein is included in the financial statements or in the notes thereto.) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Circon Corporation: We have audited the accompanying consolidated balance sheets of Circon Corporation (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years ended in the period December 31, 1996. These financial statements are the responsibilty of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Cabot Medical Corporation prior to 1995, a company acquired during 1995 in a transaction accounted for as a pooling of interests, as discussed in Note 3. The Cabot Medical Corporation statements for 1994 are included in the consolidated financial statements of Circon Corporation and reflect revenues of 43% for 1994, of the related consolidated totals, after those statements reflect adjustments for the pooling of interests as set forth in Note 3. The financial statements of Cabot Medical Corporation for 1994 prior to those adjustments were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for Cabot Medical Corporation, prior to those adjustments, is based solely upon the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors, provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Circon Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Stamford, Connecticut March 24, 1997 INDEPENDENT AUDITORS' REPORT The Board of Directors Cabot Medical Corporation: We have audited the consolidated statements of operations, shareholders' equity and cash flows of Cabot Medical Corporation and subsidiaries for the year ended October 31, 1994 (not separately presented herein). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above (not separately presented herein) present fairly, in all material respects, the results of operations and cash flows of Cabot Medical Corporation and subsidiaries for the year ended October 29, 1994 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Princeton, New Jersey March 27, 1997 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1996 ASSETS (In thousands, except for share amounts) December 31, December 31, 1995 1996 ----------- ----------- CURRENT ASSETS: Cash and temporary cash investments $ 17,586 $ 6,234 Marketable securities 6,496 1,074 Accounts receivable, net of allowance of $1,807 in 1995 and $1,644 in 1996 26,539 28,497 Inventories 31,645 35,123 Prepaid expenses and other assets 2,627 1,939 Deferred income taxes 5,932 8,046 ----------- ---------- Total current assets 90,825 80,913 ----------- ---------- DEFERRED INCOME TAXES - 831 PROPERTY, PLANT, AND EQUIPMENT, NET 53,750 53,841 OTHER ASSETS, at cost net of accumulated amortization 36,824 33,533 ----------- ---------- Total assets $ 181,399 $ 169,118 =========== ========== The accompanying notes are an integral part of these consolidated balance sheets. CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1996 LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands, except for share amounts) December 31, December 31, 1995 1996 ----------- ------------ CURRENT LIABILITIES: Current maturities of long-term $ 15,857 $ 429 Accounts payable 7,728 6,344 Accrued liabilities 10,796 12,000 Customer deposits 1,079 879 ------------ ----------- Total current liabilities 35,460 19,652 ------------ ----------- NONCURRENT LIABILITIES: Long-term obligations 56,516 50,565 Deferred income taxes 2,251 - ----------- ----------- Total noncurrent liabilities 58,767 50,565 ----------- ----------- 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 13,239,746 issued and outstanding in 1995 and 1996, respectively 126 132 Additional paid-in capital 94,928 104,426 Minimum pension liability (143) - Cumulative translation adjustment (513) (502) Accumulated deficit (7,226) (5,155) ---------- ---------- Total shareholders' equity 87,172 98,901 ---------- ---------- Total liabilities and shareholders' equity $ 181,399 $ 169,118 ========== =========== The accompanying notes are an integral part of these consolidated balance sheets. CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31,1994, 1995, and 1996 (In thousands, except per share amounts) 1994 1995 1996 --------- --------- ---------- NET SALES $ 157,041 $ 160,447 $ 153,779 Cost of sales 68,472 72,595 67,901 Circon/Cabot merger and product integration costs - 4,212 - -------- --------- ---------- GROSS PROFIT 88,569 83,640 85,878 OPERATING EXPENSES: Research and development 12,676 11,393 11,896 Selling, general and administrative 62,140 64,206 64,644 Circon/Cabot merger, business integration and other costs - 4,221 - Facilities shutdown expense (see note 3 ) - - 2,629 -------- --------- ----------- Total operating expenses 74,816 79,820 79,169 INCOME FROM OPERATIONS 13,753 3,820 6,709 Circon/Cabot merger related transaction costs - (4,936) - USSC Tender Offer (see note 4) - - (3,000) Interest income 884 1,346 347 Interest expense (5,970) (5,946) (4,199) Other income (expense), net (212) (251) 141 --------- ---------- ------------ INCOME (LOSS) BEFORE INCOME TAXES 8,455 (5,967) (2) Provision (benefit) for income taxes 1,946 (574) (73) Non-recurring tax benefit (see note 10 ) - - (2,000) ------- ---------- ------------ NET INCOME (LOSS) $ 6,509 $ (5,393) $ 2,071 ======= ========== ============ EARNINGS (LOSS) PER SHARE: $ 0.51 $ (0.41) $ 0.16 ======== ========== ============== Weighted Average Number of Shares of Common Stock and Equivalents Outstanding 12,738 13 ,237 13,339 -------- ---------- ------------ The accompanying notes are an integral part of these consolidated statements.
CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (In thousands, except share amounts) Unrealized Retained Total Additional Notes Losses on Minimum Cumulative Earnings Share- Shares Common Paid-in Receivable Marketable Pension Translation (Accumulated Treasury holders' Issued Stock Capital From Officers Securities Liability Adjustment Deficit) Stock Equity Balance --------- ------ ------- ------------- ---------- ---------- ---------- ------------ ------- -------- December 31, 1993 11,757,646 $ 118 $82,627 - - - $ (193) $ 468 $ (1,250) $ 81,770 Tax benefit from exercise of stock options - - 692 - - - - - - 692 Stock options exercised 310,363 3 1,220 (272) - - - - - 951 Stock dividends 392,678 4 8,955 - - - - (8,959) - - Unrealized loss on marketable securities - - - - (314) - - - - (314) Culative translation adjustment - - - - - - (145) - - (145) Net income - - - - - - - 6,509 - 6,509 Purchase of 111,428 shares of Treasury Stock - - - - - - - - (1,843) (1,843) Retirement of Treasury Stock (279,296) (3) (3,745) - - - - - 3,093 (655) ---------- ---- -------- ----- ---- ------ -------- ------- ------ ------ Balance December 31, 1994 12,181,391 $ 122 $ 89,749 $ (272) $ (314) - $ (338) $ (1,982) - 86,965 Tax benefit from exercise of stock options - - 1,169 - - - - - - 1,169 Stock options exercised 384,624 4 4,010 - - - - - - 4,014 Retirement of non-vested shares (1,598) - - - - - - - - - Other (338) - - 272 - - - - - 272 Unrealized losses on marketable securities - - - - 314 - - - - 314 Minimum pension liability - - - - - (143) - - - (143) Cumulative translation adjustment - - - - - - (175) - - (175) Net loss - - - - - - - (5,393) - (5,393) Cabot income - November and December 1994 - - - - - - - 149 - 149 ------- ------- ------ ------- ------ ------ ------ ------- ------ ------- Balance December 31, 1995 12,564,079 $ 126 $ 94,928 - - $ (143) $ (513) $ (7,226) - $ 87,172 Tax benefit from exercise of stock options - - 1,643 - - - - - - 1,643 Stock options exercised 675,667 6 7,855 - - - - - - 7,861 Minimum pension liability - - - - - 143 - - - 143 Cumulative translation adjustment - - - - - - 11 - - 11 Net income - - - - - - - 2,071 - 2,071 ---------- ------ ------- ------ ------- ----- ---- ------- ----- ------ Balance December 31, 1996 13,239,746 $ 132 $ 104,426 - - $ -0- $ (502) $ (5,155) - $98,901 =========== ====== ======== ======= ======= ======= ====== ======= ===== ========
CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, 1996 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES 1994 1995 1996 ------- ------- ------- Net income (loss) $ 6,509 $ (5,393) $ 2,071 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 11,492 9,603 8,598 Deferred income taxes (2,710) (2,582) (5,196) Other - 149 - Loss on disposals 115 2,042 66 Change in assets and liabilities: Accounts receivable (3,572) 478 (1,958) Inventories (363) (2,292) (3,478) Prepaid expenses and other assets 670 514 688 Other assets (520) 2,160 842 Accounts payable (179) 2,709 (1,384) Accrued liabilities 1,379 (1,576) 1,204 Customer deposits 81 606 (200) Other noncurrent liabilities (234) - - -------- -------- -------- Net cash provided by operating activities $ 12,668 $ 6,418 $ 1,253 -------- -------- -------- CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, 1996 (In thousands) CASH FLOWS FROM INVESTING ACTIVITIES 1994 1995 1996 -------- ------- ------- Disposals of marketable securities, net $ 195 $ 15,119 $ 5,422 Purchases of property, plant and equipment (12,409) (9,519) (6,306) Purchase of intangible (160) - - Cumulative translation adjustment (148) (172) 11 -------- -------- -------- Net cash provided by (used in) investing activities (12,522) 5,428 (873) -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock 953 4,011 7,861 Purchase of treasury stock (2,497) - - Repayment of long-term obligations (766) (1,437) (21,379) Tax benefit from exercise of stock options 692 1,169 1,643 Other - (478) 143 -------- -------- -------- Net cash provided by (used in) financing activities (1,618) 3,265 (11,732) -------- -------- -------- Net increase (decrease) in cash and temporary cash investments (1,472) 15,111 (11,352) Cash and temporary cash investments, beginning of year 3,947 2,475 17,586 -------- -------- ------ Cash and temporary cash investments, end of year $ 2,475 $ 17,586 $ 6,234 ======= ========= ======= SUPPLEMENTAL DISCLOSURES Cash paid for interest $ 5,354 $ 5,398 $ 3,294 ======= ======= ====== Cash paid for income taxes (net of refunds received) $ (274) $ 2,097 $ 410 ======= ====== ====== The accompanying notes are an integral part of these consolidated statements. CIRCON CORPORATION AND SUBSIDIARIES ----------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ DECEMBER 31, 1996 ----------------- (In thousands except share and per share information) (1) Background ----------- 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 (see Note 3). 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 Company markets medical devices for diagnosis and minimally invasive surgery and general surgery. The Company's products are used in a number of medical specialities including urology, gynecology, arthroscopy, laparoscopy, thorascopy and plastic surgery. The Company's product compete in markets characterized by continuing technological innovation, increasing competition and pressures on cost. Political, economic and regulatory influences are subjecting the Company's industry in the United States to rapid, continuing and fundamental change. The Company sells products worldwide from its facilities in the United States, Canada, France and Germany. Net sales by geographic areas are as follows: 1994 1995 1996 -------- -------- -------- Domestic sales $135,771 $134,262 $131,675 International sales 21,270 26,185 22,104 --------- -------- --------- $157,041 $160,447 $153,779 ======== ======== ========= (2) Summary of Significant Accounting Policies ------------------------------------------ Basis of Presentation ---------------------- The Company prepares its consolidated financial statements in accordance with generally accepted accounting principles, which require that management make estimates and assumptions that affect the reported amounts. Actual results could differ from these estimates. Certain reclassifications have been made to prior financial information to conform to current year presentation. Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of Circon and its domestic and foreign subsidiaries. All significant intercompany transaction and accounts have been eliminated in consolidation. Sales Recognition ----------------- The Company recognizes revenue from product sales upon shipment of goods. Earnings Per Share ------------------ Earnings per share have been computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the year. The number of common shares was increased for the dilutive effect of shares issuable upon the exercise stock options, except for 1995 where the effect is anti-dilutive. Inventories ------------ Inventories include costs of materials, labor and manufacturing overhead. Inventories are priced at the lower of cost (first-in, first-out) or market. Property, Plant, and Equipment and Other Assets ----------------------------------------------- Depreciation of property, plant, and equipment and amortization of other assets are provided for using the straight-line method over the following estimated useful lives: Buildings 31-33 years Manufacturing equipment 3-10 years Office and other equipment 4-10 years Demonstration equipment 1-3 years Leasehold improvements and leasehold interest Lower of estimated useful life or remaining term of lease Goodwill 20-40 years Patents and Licenses 3-17 years Trademarks 10-23 years Other 5-21 years The Company capitalizes expenditures that materially increase asset lives and charges ordinary maintenance and repairs to operations as incurred. When properties are disposed of, the costs and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the consolidated statements of operations. Long lived assets and intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Demonstration equipment, which is eventually refurbished and sold, is depreciated on a straight-line basis, after considering estimated residual value. Foreign Currency Translation ---------------------------- The assets and liabilities of foreign subsidiaries are translated into U.S. dollars at current exchange rates. The related translation adjustments are recorded in a separate component of shareholders' equity. Revenues and expenses are translated at the average exchange rates in effect during the period. Research and Development ------------------------ Expenditures for research and development are charged to operations as incurred. Temporary Cash Investments -------------------------- The Company's temporary cash investments include investments in bank money market funds and other short-term, highly liquid investments with maturities of three months or less. (3) Cabot Business Combination -------------------------- On August 28, 1995, Circon issued 4,339,302 shares of its common stock for all the outstanding shares of Cabot Medical Corporation. In connection with the merger of Circon and Cabot, $13,369 (pre-tax) of merger costs and non-recurring combination expenses were incurred and charged to expense in the third quarter of 1995. These costs include $8,433 associated with the elimination of duplicative, excess, and obsolete inventories and related production equipment and reorganizing and cross training the sales force, and $4,936 of fees and other expenses specifically associated with the merger process. Cabot had an October, 31 year end. In order to conform Cabot's year-end, the two month period from November 1, 1994 to December 31, 1994 has been included as an adjustment to retained earnings. During the second quarter of 1996, the Company announced the planned closure of its Langhorne, Pennsylvania facility. The closure was completed by the end of 1996 and will result in reduced future operating costs through human resource and facility rationalization. In connection with this plan, the Company recorded a pre-tax charge of $2,629 consisting of $2,174 of employee severance, relocation and out-placement costs and $455 of cancellation of operating leases, relocation of product and equipment and other facility closure related costs. (4) USSC Tender Offer ----------------- On August 1, 1996, United States Surgical Corporation ("USSC") through its wholly-owned subsidiary, USS Acquisition Corp., launched an unsolicited tender offer (the "Offer") for all of the common stock of the Company at a price of $18 per share. The Board of Directors considered the Offer and recommended that stockholders reject it so the Company can continue to pursue its strategic plan. In reaching its conclusion, the Board retained and consulted with Bear Stearns and Company as financial advisors and Wilson, Sonsini, Goodrich & Rosati as legal advisors. In addition, the Company retained The Abernathy/MacGregor Group Inc. to advise the Company on public relations matters, Corporate Investor Communications, Inc. to assist the Company in connection with communications to stockholders and William M. Mercer Incorporated to advise the Board of Directors on certain employee matters. In connection with rejecting the Offer, the Company adopted a Stockholders Right Plan and an Employee Retention Plan, both of which are the subject of a lawsuit brought by USSC against the Company and certain of its officers and directors. In addition, the Company and certain of its directors and officers are also defendants in certain class action lawsuits purportedly brought on behalf of Circon stockholders. On December 16, 1996, USSC reduced the offer to $17 per share and extended the solicitation until February 13, 1997. On February 13, 1997, the offer was again extended to June 16, 1997. The Company has charged $3,000 primarily for expenses related to the Offer and defending the stockholder litigation (see Part II, Item (3) Legal Proceedings and note 15.) (5) Marketable Securities ---------------------- The Company classifies its investments as held-to-maturity and available- for-sale and does not hold any trading securities. Held-to-maturity securities are recorded at cost. In 1995, the Company recorded an income statement charge of $272, included in other expense, to recognize market value losses on securities that were liquidated in early 1996 in connection with the redemption of the Cabot convertible debentures. The following summarizes the Company's marketable securities at December 31, 1995 and 1996: 1995 1996 Available-for-sale: -------- -------- ------------------- Municipal obligations $ 3,359 $ - Preferred stock in utility companies 3,112 - Mutual fund in utility companie - 1,074 Other 25 - --------- ---------- $ 6,496 $1,074 ======== ========== (6) Inventories ------------ Inventories at December 31, 1995 and 1996 consist of the following: 1995 1996 ------- ------- Raw materials $11,017 $11,995 Work in process 12,243 17,938 Finished goods 8,385 5,190 ------- ------- $31,645 $35,123 ======= ======= (7) Property, Plant, and Equipment ------------------------------ Property, plant and equipment consists of the following at December 31, 1995 and 1996: 1995 1996 ------- ------- Land $ 3,380 $ 3,380 Building 23,590 24,914 Manufacturing equipment 19,699 21,135 Office and other equipment 10,734 11,864 Platinum used in manufacturing equipment 1,450 1,434 Demonstration equipment 23,989 25,055 Construction in progress 2,706 2,677 Leasehold improvements 1,179 1,199 -------- -------- 86,727 91,658 Less - Accumulated depreciation and amortization (32,977) (37,817) --------- --------- $53,750 $53,841 ========= ========= (8) Other Assets: ------------- Other assets consist of the following at December 31, 1995 and 1996: 1995 1996 ------- ------ Goodwill $15,542 $15,480 Patents and Licenses 8,766 9,006 Trademarks 20,536 20,536 Other 4,373 3,353 Less - Accumulated amortization (12,393) (14,842) --------- -------- $36,824 $33,533 ========= ======== (9) Accrued Liabilities ------------------- Accrued liabilities consist of the following at December 31, 1995 and 1996: 1995 1996 -------- ------- Payroll and payroll related $ 5,482 $6,433 Interest 1,705 718 Taxes - other than income 956 686 Professional fees - 1,620 Other 2,653 2,543 -------- ------- $10,796 $12,000 ========= ======== (10) Income Taxes ------------- The components of the provision (benefit) for income taxes applicable to income (loss) for the three years ended December 31, 1994, 1995 and 1996 are as follows: 1994 1995 1996 ------- ------- ------ Federal Current $1,565 $1,400 $1,100 Deferred (51) (1,877) (3,164) ------- -------- -------- 1,514 (477) (2,064) ------- -------- --------- State Current 263 497 148 Deferred 126 (617) (158) -------- --------- --------- 389 (120) (10) -------- --------- --------- Foreign Current 43 23 1 --------- --------- -------- Provision (benefit) for income taxes $1,946 $(574) $(2,073) ========== ========= ========= The income before provision for income taxes includes foreign pretax losses of $437, $634 and $427 in 1994, 1995 and 1996, respectively. For income tax purposes, the Company deducts the difference between market value and exercise price arising from the exercise of non-qualified stock options and disqualifying dispositions of stock acquired under the Company's qualified plans. Any reductions in income taxes payable resulting from these differences are credited to additional paid in capital. A benefit of $692, $1,669, and $1,643 was credited to additional paid in capital during 1994, 1995 and 1996, respectively. A reconciliation of the provision (benefit) for income taxes to the Federal statutory provision (benefit) is as follows: 1994 1995 1996 ------ ------ ------- Federal statutory provision (benefit) $2,875 $(2,029) $ (1) State tax, net of federal income tax benefit 254 (60) (10) Addition (reduction) in valuation allowance (930) 716 (2,000) Non-deductible goodwill and amortization 85 (60) 20 Tax exempt income (338) (239) - Benefit of foreign sales corporation (51) (102) (350) Loss of foreign subsidiaries for which no benefit is currently available 169 179 145 Non-deductible merger costs - 1,074 - Other (118) (53) 123 -------- --------- ---------- $1,946 $ (574) $(2,073) ======== ========= =========== The components of the net deferred tax asset are as follows: 1995 1996 ------- -------- Inventory reserves $4,229 $3,739 Accrued vacation 574 591 Net operating loss carryforwards 2,719 4,534 Income tax credit carryforwards 1,569 1,620 Depreciation (4,317) (4,128) Other reserves 1,446 2,371 Other 180 856 ------ ------- 6,400 9,583 Valuation allowance (2,719) (706) ------- -------- Net deferred tax asset $3,681 $ 8,877 ======= ======== During the second quarter of 1996, Cabot Medical was liquidated and merged into Circon. Prior to the merger, the Cabot net operating loss carryforwards (NOLS) had a valuation allowance since historical data did not support current recognition of the loss carryforwards. With the liquidation, Circon's ability to utilize these NOLS became more probable than not and the Company recognized a non-recurring tax benefit by reducing the valuation allowance by $2,000 in 1996. At December 31, 1995 and 1996, the Company has recorded a deferred tax asset of $1,569 and $1,620, respectively, consisting of research and development credits not previously utilized and alternative minimum tax credit carryforwards. The Company has recorded a valuation allowance, which at December 31, 1995, includes Cabot pre-pooling losses subject to separate income tax return limitations. The valuation allowance at December 31, 1996 represents Cabot losses subject to separate state income tax return limitations and capital loss carryfowards. Based on projected earnings and the Company's current tax planning strategies, the Company believes it is more probable than not that the remaining net deferred tax asset will be realized. (11) Long-Term Obligations --------------------- Long-term obligations as of December 31, 1995 and December 31, 1996 consist of the following: 1995 1996 -------- -------- Revolving credit facility $ - $46,500 7.5% convertible subordinated notes 67,000 - Industrial development authority bonds due December 2, 2006 5,180 4,435 Other 193 59 -------- -------- 72,373 50,994 -------- -------- Less-current maturities (15,857) (429) -------- ------- $56,516 $50,565 ======== ======= The Company has a $75 million 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 in the amount of approximately $5,327 as of December 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 operating facilities. These facilities had a net carrying value of $4,487 as of December 31, 1996. The Company repurchased at par, 99.94% of the 7.5% convertible notes pursuant to a vote of bondholders taken on November 20, 1995. Approximately $50.5 million of the Credit Facility and approximately $16.5 million of available cash was used to repurchase the notes in 1996. Accordingly, $50.5 million was classified as a long-term obligation at December 31, 1995. Future principal maturities of the long-term obligations are as follows: 1997 $ 429 1998 390 1999 405 2000 430 2001 46,950 Thereafter 2,390 ------- $50,994 ======= (12) Retirement Plans ---------------- The Company has a defined benefit retirement plan (the "Plan") covering certain hourly union employees at one of the Company's manufacturing facilities. The components of pension expense are as follows: 1994 1995 1996 ------ ------ ------ Service cost - benefits earned during the year $ 38 $ 46 $ 73 Interest cost on projected benefit obligation 55 73 91 Actual return on plan assets (12) (38) (40) Deferred loss on net assets (36) (29) (45) Amortization of prior service cost 9 14 24 Amortization of net loss (gain) from earlier periods (3) 3 15 -------- ------ ------ Net pension expense $ 51 $ 69 $ 118 ======== ====== ====== Annual contributions to the Plan are at least equal to the minimum required by law. The benefit obligations and funded status of the Plan are as follows: 1995 1996 ------ ----- Actuarial present value of accumulated benefit obligation, including vested benefits of $1,064 in 1995 and $1,246 in 1996 $ (1,161) $ (1,368) ======= ======= Projected benefit obligation for service rendered to date (1,161) (1,368) Plan assets at market value, primarily fixed income securities 818 951 ------- ------- Projected benefit obligation in excess of plan assets (343) (417) Unrecognized net loss 340 322 Unrecognized prior service cost 128 232 Adjustment required to recognize minimum liability (472) (557) Unrecognized net obligation at January 1, 1989 being amortized over 15 years 3 3 ------- ------- Pension liability $ (344) $ (417) ======== ======== The discount rate assumed in determining the actuarial present value of benefit obligations was 7.25% for 1995 and 1996. The expected long term rate of return on assets was 10% for 1995 and 1996. There were no plan amendments during 1995 or 1996. Certain other hourly manufacturing employees are covered by a union-sponsored collectively-bargained, multi-employer pension plan. Contributions to this plan are based on collectively-bargained agreements and were approximately $74, $196 and $313 in 1994, 1995 and 1996, respectively. The Company maintains a 401(k) savings plan for all U.S. based employees. The Company matches 50% of the first 3% of employee contributions, except those excluded by collective bargaining agreements. The amounts charged to income for the Company match were $247, $257 and $332 in 1994, 1995 and 1996, respectively. Beginning January 1, 1996, Cabot employees became eligible to participate in the 401(k) savings plan. (13) Stock-Based Compensation Plans ------------------------------ Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Compensation costs for phantom stock rights are recorded annually based on the quoted market price of the Company's Stock at the end of the period. The Company has two stock-based compensation plans, a 1993 Stock Option Plan (the "1993 Plan"), and a 1995 Directors Stock Option Plan (the "1995 Plan"). The Company accounts for these plans pursuant to APB No. 25, under which no compensation cost has been recognized for stock options granted. Had compensation cost for these stock options been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following proforma amounts: 1996 1995 ---------- ------------ Net Income: As Reported $2,072,000 $(5,386,000) Pro Forma 1,416,646 (5,608,723) Primary EPS: As Reported 0.16 (0.41) Pro Forma 0.11 (0.46) The effects of applying SFAS 123 in this proforma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. The 1993 Plan was adopted by the Board of Directors of Circon Corporation, and subsequently approved by the stockholders. Pursuant to the 1993 Plan, the Company may grant options for shares of common stock to employees and consultants of the company, for a price not less than the fair market value on the date of grant. The total number of shares of stock with respect to which options may be granted under the 1993 Plan shall be 2,000,000 shares. As of December 31, 1996, 704,251 options have been issued under the 1993 Plan. The 1995 Plan was adopted by the Board of Directors of Circon Corporation, and subsequently approved by the stockholders. Pursuant to the 1995 Plan, the Company may grant options for shares of common stock to directors who are not officers of the Company, for a price not less than 85% of the fair market value of the common stock on the date of grant. The total number of shares of stock with respect to which options may be granted under the 1995 Plan shall be 200,000 shares. As of December 31, 1996, no options have been issued or granted. Option activity during 1996, 1995 and 1994 are summarized as follows: 1996 1995 1994 ------------------- ----------------- ---------------------- Weighted Weighted Average Average Option Exercise Exercise Price Shares Price Shares Price Shares Range --------- -------- -------- ------- --------- ------------- Outstanding at beginning of year 1,669,649 $10.740 1,873,705 $10.823 1,468,044 $2.89 - 19.125 Granted 176,402 10.304 330,625 12.201 960,772 8.50 - 13.200 Exercised 675,667 11.596 384,624 10.442 319,517 2.89 - 15.090 Adjustment for Cabot Stock Dividends - - - - 102,505 2.89 - 16.600 Forfeited (129,066) 11.186 (150,057) 12.254 (338,099) 2.89 - 18.750 ---------- -------- ---------- -------- --------- ------------- Outstanding at end of year 1,041,318 10.054 1,669,649 10.740 1,873,705 2.89 - 19.125 Exercisable at end of year 428,737 10.451 836,825 11.267 596,675 2.89 - 19.125 Weighted average fair value of options granted 6.270 5.82
The following table summarizes information about stock options outstanding at December 31, 1996: Options Outstanding Options Exercisable - --------------- ---------------------------------------------- ------------------------------ Number Weighted Average Weighted Number Weighted Range of Outstanding at Remaining Average Exercisable at Average Exercise Prices 12/31/96 Contractual Life Exercise Price 12/31/96 Exercise Price - --------------- ------------- ---------------- -------------- -------------- -------------- $2.89 - $6.25 59,835 2.350 $4.009 56,627 $3.929 6.23 - 12.75 872,450 5.733 9.733 293,103 10.310 12.76 - 18.75 109,033 5.789 15.937 79,007 15.649 ----------- -------------- $2.89 - $18.75 1,041,318 5.544 $10.054 428,737 $10.451
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 1995 and 1996, respectively: risk-free interest rates of 6.29 and 6.05 percent; expected lives of 4.17 and 7 years; expected dividend rate of zero; and expected volatility of 50.98 and 51.94 percent. (14) Rights and Warrants ------------------- On August 21, 1996, the company issued a dividend of one right ("Right") for each share of the Company's Common stock. Each Right represents the right to purchase one-thousandth of a share of Series A Participating Preferred Stock upon terms and conditions set forth in the Rights Argument. Accordingly, 40,000 of the Company's authorized but unissued Preferred Stock was designated as "Series A Participating Preferred Stock." In 1989, the Company issued to the Company's president warrants (the "Warrants") to purchase up to $2.5 million of common stock at $4.33 per share (or less under certain circumstances). The Warrants were issued in consideration for the president agreeing to restructure his commitment to provide working capital to the Company and to convert, at the demand of the Company, outstanding borrowings owed to him into common shares (at the market price per share on the conversion date) to prevent technical default under the Company's loan agreement (the "Stock Purchase Commitment"). On May 7, 1990, the Company's president agreed to return the Warrants. The Company terminated the Stock Purchase Commitment and issued a warrant which allow the president to purchase 100,000 shares of common stock at $4.61 per share. The warrants expire on January 1, 2000 or earlier under certain circumstances. The Company has a warrant plan for consultants. A total of 25,000 shares of common stock has been reserved under this plan and warrants to purchase 3,000 shares have been granted at an exercise price of $18.75 per share, of which 2,000 are still outstanding. (15) Commitments and Contingencies ----------------------------- Leases ------ The Company leases five facilities, one each in Connecticut, Germany, and France and two in Canada, under operating leases which expire in 2003, 1999, 2002 and 2002, respectively. These leases provide for additional rental payments to cover property taxes, insurance and maintenance. In addition, the Company leases office equipment and vehicles. Rental expense for the years ended December 31, 1994, 1995 and 1996 was $2,027, $1,543, and $1,497, respectively. The minimum lease payments at December 31, 1996 are as follows: 1997 $ 1,804 1998 1,786 1999 1,652 2000 1,664 2001 1,709 2002 and thereafter 5,340 ------- $13,955 ======= Contingencies ------------- In May 1996, an action was brought against the Company and certain officers and directors alleging that the defendants knew synergies from the Cabot merger would not be achieved but misrepresented to the public they would be achieved, in order to obtain approval for the merger. In August 1996 and shortly thereafter, actions were brought against the Company and certain officers and directors alleging breach of fiduciary duty by taking steps to resist the hostile USSC tender offer. The Company believes the above actions and the USSC suit discussed in Note 4 are without merit and intends to vigorously defend the suits. Litigation is inherently unpredictable. No assurance can be given that the Company will be successful in these matters, or that they will not result in future charges to income which could be significant. In the course of conducting its business, the Company has various claims asserted against it. Management believes the outcome of these claims will not have a material adverse effect on the Company's financial position or results of operations. (16) Quarterly Financial Information (Unaudited) ------------------------------------------- The following is a summary of unaudited selected quarterly financial data for the years ended December 31, 1995 and 1996: Quarter Ended -------------------------------------------------- 1996 March 31 June 30 September 30 December 31 - --------------------- ---------- -------- ------------ ----------- Net sales $39,962 $37,062 $38,369 $38,386 Gross profit 22,198 20,596 21,339 21,745 Operating income 3,578 (1,166) 1,857 2,440 Net income 1,659 705 (1,525) 1,232 Net income per share $ 0.13 (B)$ 0.05 (C)$ ( 0.11) $ 0.09 1995 - -------------------- Net sales $ 37,921 $41,833 (A)$42,113 $38,580 Gross profit 20,523 22,478 19,266 21,373 Operating income 2,251 2,261 (3,378) 2,686 Net income 621 345 (7,374) 1,015 Net income per share $ 0.05 $ 0.03 $( 0.56) $ 0.08 (A) Includes special charges - see Note 3 (B) Includes facility shut down expense and non-recurring income tax benefit- see Notes 3 and 10 (C) Includes USSC tender offer charges - see Note 4 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant. Directors of the Registrant The Company's Board of Directors is divided into three classes. The term of one of the three classes expires each year. The term of the Class I Directors expires in 1997 and each third year thereafter, the term of the Class II Directors expires in 1998 and each third year thereafter, and the term of the Class III Directors expires in 1996 and each third year thereafter. If any Director who was elected while serving as an officer ceases to be an officer during that Director's term, such Director's term will expire at the next subsequent annual meeting of Shareholders. The following persons are currently serving on the Board of Directors of the Company: Director Name Principal Occupation Class Age Since - ----------------- ----------------------- ----- ---- --------- Richard A. Auhll Chairman of the Board, President, and Chief Executive Officer of the Company I 55 1969 John F. Blokker President and Chief Executive Officer, Luxcom, Inc. III 67 1991 Harold R. Frank Investor III 72 1984 Paul W. Hartloff, Partner, law firm of Jarvis, Jr. Hartloff & Simon, LLP I 63 1991 Rudolf R. Schulte Rancher, Investor II 65 1977 Mr.Auhll has been the Chairman of the Board of Directors, President and Chief Executive Officer of the Company since 1969. Mr.Auhll has a Bachelor of Science degree in Engineering from the University of Michigan, a Master of Science degree in Engineering from Stanford University, and a Master of Business Administration degree from Harvard University. Prior to 1969, Mr.Auhll held positions with United Technologies Corporation and was a management consultant. Mr. Auhll is a member of the Board of Trustees of the University of California at Santa Barbara Foundation and a member of the Foundations Executive Committee. He is past Chairman of the Board of Directors of Seton School for Developmentally Disabled Children. Mr.Blokker is President and Chief Executive Officer of Luxcom, Inc., a telecommunications company. He was a general partner of Hambrecht & Quist Venture Partners, an investment banking firm, from February 1985 to February 1988. Prior to 1985, he served for twenty-seven years in various executive and management positions including Vice President, General Manager with Hewlett- Packard Company, a manufacturer of computers and electronic test and measurement instruments. He is a member of the Boards of Directors of Mid- Peninsula Bank of Palo Alto and Whittier Trust Company. Mr. Frank is the founder of Applied Magnetics Corporation, a manufacturer of magnetic recording heads. He served as Chairman of its Board of Directors from inception until February, 1996 and continues to serve as a Director. Mr.Frank also currently serves on the Board of Directors of Trust Company of the West and as Chairman of the Board of Key Technology, Inc. Mr.Frank is past Chairman of the Board of the American Electronics Association. Mr.Hartloff is a partner of the law firm of Jarvis, Hartloff & Simon, LLP founded in 1996. He was a senior partner of the law firm of Schramm& Raddue from 1964 to 1996. Mr. Hartloff serves as a member of the Board of Directors of Mehl Biophile International Corporation. Mr.Schulte was a founder of Heyer-Schulte Corporation and served as President and Chairman of its Board of Directors from 1963 until it was acquired by American Hospital Supply Corporation in 1974. From 1978 to 1995 Mr. Schulte served as Chairman of the Board of Directors of Pudenz-Schulte Medical Research Corporation, a manufacturer of medical products acquired by Medtronic, Inc. In 1995. Mr. Schulte has been an independent investor since 1974. Executive Officers of the Registrant First Year Elected Name Position with Company Age Office - ----------------- --------------------- ---- --------- Richard A. Auhll President and Chief 55 1969 Executive Officer Winton L. Berci Vice President, 41 1989 Marketing and Sales Frank D. D'Amelio Vice President, Chief 38 1989 Manufacturing Officer Richard L. Devine Vice President 49 1994 International Sales David M. Piggin Vice President 49 1994 International Sales Andrew D. Simons Vice President 36 1996 Secretary, General Counsel R. Bruce Thompson Executive Vice President 52 1982 Chief Financial Officer Frederick L. Wallach Vice President 45 1996 Corporate Controller David P. Zielinski Vice President, General 54 1994 Manager ACMI Division For certain information concerning the business experience of Mr. Auhll refer to previous section titled "Directors of the Registrant." Winton Berci joined the Company as Vice President, Marketing and Sales in 1989. Prior to joining Circon, he worked for fourteen years with Karl Storz Endoscopy America, Inc., a major Circon competitor. He held various positions with Karl Storz including Director of Marketing for six years. Frank D'Amelio was appointed Vice President, Chief Manufacturing Officer in 1994, prior to which he was Vice President, General Manager of the Video Division since 1993, and Vice President, CIRCON ACMI Engineering and Quality Control, beginning in 1989. Prior to 1989, Mr. D'Amelio held various positions with the Company including Director of Quality Assurance. He joined ACMI in 1982. Richard Devine joined the Company in 1974. He served as International Sales Manager until 1986 at which time he became Director of International Sales. In 1993, Mr. Devine was appointed Vice President of International Sales. David Piggin joined the Company in 1983 as International Sales Manager. He became Director of International Sales in 1986. Mr. Piggin was appointed Vice President of International Sales in 1993. Andrew Simons joined the Company as Vice President, Secretary and General Counsel in 1996. From 1992 until joining Circon, Mr. Simons worked for Tokos Medical Corporation in various capacities, including Vice President, General Counsel and Corporate Secretary. Prior to 1992, Mr. Simons was an Associate at the law firm of Gibson, Dunn & Crutcher. Bruce Thompson has been Executive Vice President and Chief Financial Officer since 1985, and Vice President since 1982. He joined the Company in 1977 as Controller. Prior to 1977, Mr. Thompson held positions with Heyer- chulte Corporation, a subsidiary of American Hospital Supply Corporation and Cutter Laboratories, Inc. Fred Wallach joined the Company in 1983 as Assistant Controller. In 1990, he was promoted to Corporate Controller. Mr. Wallach was appointed Vice President in 1996 and retains his position as the Company's Corporate Controller. David Zielinski was appointed Vice President, General Manager of Circon ACMI in 1994, prior to which he was Vice President of Manufacturing for Circon ACMI. Prior to 1986, Mr. Zielinski held various positions with the Company including Director of Manufacturing for ACMI. He joined ACMI in 1982. Prior to joining ACMI, Mr. Zielinski held various positions with General Electric. Item 11. Executive Compensation. Compensation Tables Summary Compensation Table. The following table sets forth three years of compensation history for the Chief Executive Officer and each of the other four most highly compensated executive officers of the Company in 1996: Annual Compensation (1) Long-Term Compensation -------------------------------- --------------------------- Awards Payouts ----------------- --------- Other Securities Annual Restricted Underlying LTIP All Other Name and Compen- Stock Options Payouts Compen- Principal Position Year Salary ($) Bonus ($) sation ($) ($) (#) ($) sation ($) - ------------------ ----- ---------- -------- ---------- ------ -------- -------- ------------ R. Auhll 1996 $316,500 n/a (2) - - - - $10,538 (3) President, CEO and 1995 $298,000 $136,739 - - - - $10,408 Chairman of the Board 1994 $237,930 $107,475 - - - - $10,210 R.B. Thompson 1996 $176,000 n/a (2) - - - - $ 5,312 (4) Executive Vice President 1995 $166,000 $64,840 - - - - $ 4,192 Chief Financial Office 1994 $140,080 $52,202 - - 20,000 - $ 3,977 F. D'Amelio 1996 $181,000 n/a (2) - - - - $ 4,432 (5) Vice President 1995 $169,000 $58,000 - - - - $ 3,672 Chief Manufacturing 1994 $143,000 $48,310 - - 23,750 - $ 3,303 Officer W. Berci 1996 $163,240 n/a (2) - - - - $ 3,621 (6) Vice President 1995 $154,000 $45,500 - - - - $ 3,283 Marketing and Sales 1994 $132,000 $36,073 - - 20,000 - $ 2,567 D. Zielinski 1996 $150,431 n/a (2) - - - - $ 2,819 (7) Vice President 1995 $141,916 $56,526 - - - - $ 4,279 ACMI Division 1994 $136,000 $51,790 - - 23,750 - $ 3,559 General Manager (1) Includes amounts earned in fiscal year, whether or not deferred. (2) Bonus amounts for 1996 have not yet been calculated or paid. Such amounts will be filed in the Company's 1997 proxy statement (3) Reflects $4,750 Company match of employee contributions to 401(k) plan and $5,788 premium on life insurance paid by the Company. (4) Reflects $3,948 Company match of employee contributions to 401(k) plan and $1,364 premium on life insurance paid by the Company. (5) Reflects $3,739 Company match of employee contributions to 401(k) plan and $693 premium on life insurance paid by the Company. (6) Reflects $3,107 Company match of employee contributions to 401(k) plan and $514 premium on life insurance paid by the Company. (7) Reflects $2,819 premium on life insurance paid by the Company.
Option/SAR Grants in Last Fiscal Year. None of the executive officers named in the Summary Compensation Table received a grant of stock options during the year ended December 31, 1996. The Company has never granted stock appreciation rights (SARs). Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values. The following table sets forth, for each of the executive officers named in the Summary Compensation Table above, each exercise of stock options during the year ended December 31, 1996 and the year-end value of unexercised options: Number of Securities Value of Unexercised Underlying Unexercised Options In-the-Money Options Shares Fiscal Year End 1996 at Fiscal Year End 1996 Acquired on Value -------------------------- ------------------------------ Name Exercise(#) Realized($)(1) Exercisable Unexercisable Exercisable(2) Unexerable (2) - -------------- ----------- -------------- ----------- ------------- -------------- -------------- R. Auhll n/a n/a 30,000 (3) 10,000 $150,000 (3) $50,000 R.B. Thompson n/a n/a 5,714 14,286 $34,284 $85,716 F. D'Amelio n/a n/a 24,817 22,812 $238,561 $141,584 W. Berci n/a n/a 16,914 14,286 $160,284 $85,716 D. Zielinsk n/a n/a 6,786 16,964 $40,716 $101,784 (1) Excess of market price over exercise price, on the date of exercise. (2) Excess of $15.25 (market price at year end) over exercise price. (3) Mr. Auhll also holds warrants to purchase 100,000 shares which were fully exercisable at year end. The value of these warrants, computed as in note (2), was $1,064,000. The warrants were issued in 1990 in connection with Mr. Auhll's guarantee of certain indebtedness of Company and not in connection with his performance of services to the Company.
Compensation of Directors Directors, other than officers of the Company, receive a retainer fee of $2,500 annually for service on the Board, including service on any Board Committees. There directors also receive a fee of $500 for each Board and committee meeting attended and reimbursement for expenses incurred in connection with attendance at Board and committee meetings. In 1995, the shareholders approved the adoption of the 1995 Directors Stock Option Plan (the "1995 Plan") to replace the 1984 Directors Stock Option Plan (the "1984 Plan") which expired in 1994. The 1995 Plan is substantially similar to the 1984 Plan. Under the 1995 Plan, options for up to 200,000 shares of common stock may be granted to directors who are not officers of the Company, for a price not less than 85% of the fair market value of the common stock on the date of grant. The vesting schedule for the options granted is determined by a committee of directors at the time of the option grant. The maximum option term is ten years. If the optionee ceases to be a director for any reason, any options granted which have not been exercised will be canceled. No options were granted to directors in 1996. Severance Agreements In August 1996, the Company established a Management Retention Plan (the "Plan") designed to retain managers and ease their concerns regarding a possible change in control of the Company. All of the Company,s executive officers are participants in the Plan as well as certain other key employees, including the domestic sales force, at reduced benefit levels. The Plan provides for severance benefits of 2.5 times the participants Annual Compensation (as defined in the Plan) in the case of Mr. Auhll and 2.0 times the participants Annual Compensation in the case of Mr. Thompson, Mr. DAmelio, Mr. Berci and Mr. Zielinski. The severance benefit is only paid if the officer is involuntarily terminated other than for "cause" (defined below) following a "change in control" (defined below), provided, however, that one third of the severance benefit will be paid to the officer as a retention payment if the officer remains employed by the Company for ninety days after the date of the change in control. The Plan also provides for continuation of healthcare benefits in the event of an involuntary termination without cause for 2.5 years in the case of Mr. Auhll and 2.0 years in the case of the other named executive officers. The Plan terminates on August 20, 1998 unless extended by the Board of Directors or a change in control occurs prior to that time. The Boad of Directors of the Company has discretionary authority to amend the Plan in any respect and also to terminate the Plan unless a change in control has occurred. "Cause" is defined in the Plan as (i) any act of personal dishonesty taken by the participant in connection with his responsibilities as an employee and intended to result in substantial personal enrichment of the participant, (ii) the participant's conviction of a felony, (iii) a willful act by the participant which constitutes gross misconduct and which is injurious to the Company, or (iv) continued substantial violations by the participant of the participant's employment duties which are demonstrably willful and deliberate on the participant's part after there has been delivered to the participant a written demand for performance from the Company which specifically sets forth the factual basis for the Company's belief that the participant has not substantially performed his duties. A "Change of Control" is defined in the Plan as the occurrence of any of the following: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securites Exchange Act of 1934, as amended) becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) a change in the composition of the Board occurring within a two-year period, as a result of which fewer than a majority of the directors are incumbent directors. "Incumbent directors" shall mean directors who either (a) are directors of the Company as of the date hereof, or (b) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the incumbent directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); or (iii) the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) the consummation of the sale or disposition by the Company of all or substantially all the Company's assets. Information Regarding Compensation Committee Interlocks and Insider Participation Directors Auhll, Frank and Schulte comprise the Compensation Committee. Mr. Auhll also serves as President and Chief Executuve Officer of the Company. Mr. Auhll participates in discussions regarding compensation for executive officers, except discussions regarding the Chief Executive Officer. No other member of the Compensation Committee is a former or current officer or employee of the Company or any of its subsidiaries. Furthermore, there are no compensation committee interlocks between Circon and other entities involving the Company's executive officers and board members. Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth certain information as of March 11, 1997, except as otherwise indicated, regarding the beneficial ownership of Common Stock of Circon by (i) each person who is known to Circon to be the beneficial owner of 5% or more of Circon's Common Stock, (ii) each director of Circon, (iii) certain executive officers of Circon and (iv) all directors and executive officers as a group. To the Company's knowledge, the beneficial owners named in the table have sole voting and investment power with respect to the shares. Shares Beneficially Percent of Name Owned Class(1) - ---------------------------------- ------------ ---------- Richard A Auhll 6500 Hollister Avenue Santa Barbara, CA 93117 1,548,142(2) 11.5% Chancellor LGT Asset Management, Inc. 1166 Avenue of the Americas New York, NY 10036 1,333,600(3) 9.9% US Surgical Corporation 150 Glover Avenue Norwalk, CT 06856 1,000,100(3) 7.4% Franklin Resources, Inc 777 Mariners Island Blvd. San Mateo, Ca 94404 855,900(3) 6.3% Rudolf R. Schulte 409,270(4) 3.0% R. Bruce Thompson 39,060(5) * Harold R. Frank 35,848(6) * Paul W. Hartloff, Jr. 27,531(7) * John F. Blokker 26,531(8) * Frank D. D'Amelio 24,817(9) * Winton L. Berci 17,414(10) * David P. Zielinski 12,286(11) * All directors and executives officers as a group (13 persons) 2,162,091(12) 16.0% - ------------------------- * Less than 1% (1) Percent of the outstanding shares of Common Stock, treating as outstanding all shares issuable upon exercise of options held by particular beneficial owners that are included in the first column. (2) Includes 130,000 shares subject to warrants and option exercisable currently or within 60 days. (3) Information is given as of December 31, 1996, and is based on a Schedule 13D or Schedule 13G filed by this shareholder. (4) Includes 2,858 shares subject to options exercisable currently or within 60 days. (5) Includes 5,714 shares subject to options exercisable currently or within 60 days. (6) Includes 1,429 shares subject to options exercisable currently or within 60 days. (7) Includes 26,531 shares subject to options exercisable currently or within 60 days. (8) Includes 26,531 shares subject to options exercisable currently or within 60 days. (9) Includes 24,817 shares subject to options exercisable currently or within 60 days. (10) Includes 16,914 shares subject to options exercisable currently or within 60 days. (11) Includes 6,786 shares subject to options exercisable currently or within 60 days. (12) Includes 257,368 shares subject to warrants and options exercisable currently or within 60 days. Item 13. Certain Relationships and Related Transactions. None. PART IV Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K. a. Financial Statements and Schedules Filed 1. Financial Statements - see Item 8 of this Report. 2. Supplemental Schedules - see Item 8 of this Report. b. The Company filed no Reports on Form 8-K in the fourth quarter of 1996 with the Securities and Exchange Commission. c. Exhibit Index 3.1. Certificate of Incorporation of Circon Corporation, (incorporated by reference to Exhibit 3.1 of the Form 10-K filed by the Company for 1986). 3.1A. Certificates of Amendment of Certificate of Incorporation of Circon Corporation (incorporated by reference to Exhibit 3.1A of the Form 10-K filed by the Company for 1992). 3.1B. Certificate of Amendment of Certificate of Incorporation of Circon Corporation merging Cabot Medical Corporation into Circon Corporation (incorporated by reference to Exhibit 3.1B of the form 10-Q filed by the Company for the quarter ended June 30, 1996). 3.1C. Certificate of Amendment of Certificate of Incorporation of Circon Corporation providing that no action required or permitted to be taken at a meeting of the shareholders maybe taken without a meeting or by written consent (incorporated by reference to Exhibit 3.1C of the form 10-Q filed by the Company for the quarter ended June 30, 1996). 3.1D. Certificate of Designation or Rights, Preferences and Privileges of Series A Participating Stock of Circon Corporation (incorporated by reference to the Registration Statement on Form 8-A filed by the Company on August 15, 1996). 3.2A. Bylaws of Circon Corporation, as amended, (incorporated by reference to Exhibit 3.2A of the Form 10-K filed by the Company for 1993). 4.1 Warrant Agreement between Richard A. Auhll and the Company dated May 7, 1990 (incorporated by reference to Exhibit 4.5 of the 10-K filed by the Company for 1990). 4.2 Preferred Shares Rights Agreement between Circon Corporation and Rights Agent dated August 14, 1996 (incorporated by reference to the Form 8-A filed by the Company on August 15, 1996). 10.1. 1983 Stock Option Plan (incorporated by reference to the Form S-8 filed by the Company on November 14, 1991). 10.2. 1984 Directors Stock Option Plan (incorporated by reference to the Form S-8 filed by the Company on November 14, 1991). 10.3 1991 Employee Stock Option Plan (incorporated by reference to the Form S-8 filed by the Company on November 14, 1991). 10.4 1993 Stock Option Plan (incorporated by reference to the Form S-8 filed by the Company on August 18, 1993). 10.5 Circon Corporation Business Loan Agreement covering a $75,000,000 Revolving Line of Credit between Registrant and a Bank dated November 22, 1995 (incorporated by reference to Exhibit 10.12 of the form 10-K filed by the Company for 1995). 10.6 Form of Indemnification Agreement with directors and executive officers (incorporated by reference to the Schedule 14d-9 filed by the Company on August 15, 1996). 10.7 Form of Employee Retention Plan for certain officers (incorporated by reference to Amendment No. 3 to the Schedule 14d-9 filed by the Company on August 27, 1996). 11. Computation of Net Income per Share. 21. Subsidiaries of the Registrant. 23. Consent of Independent Public Accountants. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has caused this Annual Report to be signed on its behalf by the undersigned, thereupon duly authorized. DATED: March 28, 1997 -------------- CIRCON CORPORATION (Registrant) By ------------------------------------ Richard A. Auhll President, Chief Executive Officer Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, which include the Chief Executive Officer, the Chief Financial Officer, the Chief Accounting Officer and a majority of the Board of Directors, on behalf of the Registrant and in the capacities and on the dates indicated: Signatures Title Date - ------------------ --------------------------- ------------ President, Chief Executive Officer and Chairman of the Board (Principal Executive 3/28/97 - ------------------ Officer) --------------- Richard A. Auhll Executive Vice President and Chief Financial Officer (Principal Financial and 3/28/97 - ------------------- Accounting Officer) --------------- R. Bruce Thompson 3/26/97 - ------------------- Director -------------- Harold R. Frank 3/26/97 - ------------------- Director --------------- Rudolf R. Schulte 3/27/97 - -------------------- Director --------------- Paul W. Hartloff, Jr. - -------------------- Director --------------- John Blokker ____________________________________________________________________________ EX-27 2 ART. 5 FDS FOR 10 K
5 1,000 12-MOS DEC-31-1996 DEC-31-1996 6,234 1,074 30,141 1,644 35,123 80,913 91,658 37,817 169,118 19,652 0 0 0 132 98,769 169,118 153,779 153,779 67,901 79,169 3,000 0 4,199 (2) (2,073) 2,071 0 0 0 2,071 .16 .16
-----END PRIVACY-ENHANCED MESSAGE-----