-----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, DM3sHywHz3ikVvk70eJ6HfmZVAhoaN/QM4XUKoc8ix4KXX1uYmq059mvLajLaMKN GoB1Wzbuk4KI8KtmIj1i+g== 0000719727-98-000002.txt : 19980518 0000719727-98-000002.hdr.sgml : 19980518 ACCESSION NUMBER: 0000719727-98-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIRCON CORP CENTRAL INDEX KEY: 0000719727 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 953079904 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12025 FILM NUMBER: 98622633 BUSINESS ADDRESS: STREET 1: 6500 HOLLISTER AVE CITY: SANTA BARBARA STATE: CA ZIP: 93111 BUSINESS PHONE: 8059670404 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED March 31, 1998 COMMISSION FILE NO. 0-12025 CIRCON CORPORATION - ----------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 95-3079904 - ------------------------------------------------------ (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 6500 Hollister Avenue, Santa Barbara,California 93117-3019 - ---------------------------------------------------------- (Address of Principal (Zip Code) Executive Offices) Registrant's telephone number, including area code: (805) 685-5100 - --------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of Common Shares Outstanding at March 31, 1998: 13,326,812 ---------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND MARCH 31,1998 ASSETS (In thousands, except for share amounts) (UNAUDITED) December 31, March 31, 1997 1998 --------- --------- CURRENT ASSETS: Cash and temporary cash investments $ 3,660 $ 3,340 Marketable securities 1,115 1,119 Accounts receivable, net of allowance of $1,606 in 1997 and $1,617 in 1998 32,024 29,159 Inventories 38,489 40,587 Prepaid expenses and other assets 3,470 2,607 Deferred income taxes 5,172 4,181 ---------- ---------- Total current assets 83,930 80,993 ---------- ---------- DEFERRED INCOME TAXES 1,289 1,289 PROPERTY, PLANT, AND EQUIPMENT, NET 53,503 52,992 OTHER ASSETS, at cost net of accumulated amotization 30,635 30,018 --------- ---------- Total assets $ 169,357 $ 165,292 ========= ========== The accompanying notes are an integral part of these consolidated balance sheets. CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND MARCH 31,1998 LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands, except for share amounts) (UNAUDITED) December 31, March 31, 1997 1998 --------- --------- CURRENT LIABILITIES: Current maturities of long-term obligations $ 390 $ 390 Accounts payable 4,629 4,528 Accrued liabilities 10,892 10,778 Customer deposits 688 781 --------- --------- Total current liabilities 16,599 16,477 --------- --------- NONCURRENT LIABILITIES: Long-term obligations 48,799 43,799 SHAREHOLDERS' EQUITY: Preferred stock: $0.01 par value 1,000,000 shares authorized, none outstanding Common stock: $0.01 par value 50,000,000 shares authorized 13,243,448 and 13,308,480 issued and outstanding in 1997 and 1998, respectively 133 133 Additional paid-in capital 105,079 105,445 Cumulative translation adjustment (1,197) (1,725) Accumulated (deficit) earnings (56) 1,163 --------- --------- Total shareholders' equity 103,959 105,016 --------- --------- Total liabilities and shareholders' equity $ 169,357 $ 165,292 ========= ========= The accompanying notes are an integral part of these consolidated balance sheets. CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended March 31, (In thousands, except per share amounts) (UNAUDITED) (UNAUDITED) 1997 1998 --------- --------- NET SALES $ 38,393 $ 36,279 Cost of sales 16,927 15,871 --------- --------- GROSS PROFIT 21,466 20,408 OPERATING EXPENSES: Research and development 2,784 2,768 Selling, general and administrative 16,679 14,882 --------- --------- Total operating expenses 19,463 17,650 INCOME FROM OPERATIONS 2,003 2,758 Interest income 141 10 Interest expense (919) (874) Other (expense) income, net (9) 10 --------- --------- INCOME BEFORE INCOME TAXES 1,216 1,904 Provision for income taxes 425 685 NET INCOME $ 791 $ 1,219 ========= ======== BASIC EARNINGS PER SHARE : $ 0.06 $ 0.09 ========= ======== DILUTED EARNINGS PER SHARE : $ 0.06 $ 0.09 ========== ======== Weighted Average Number of Shares of Common Stock and Equivalents Outstanding BASIC 13,241 13,308 --------- -------- DILUTED 13,664 13,725 --------- -------- The accompanying notes are an integral part of these consolidated statements. CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For Three Months Ended March 31, 1998 (In thousands) (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES 1997 1998 -------- ------- Net income $ 791 $ 1,219 Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation and amortization 2,151 2,169 Change in assets and liabilities: Accounts receivable (1,253) 2,865 Inventories (2,513) (2,098) Prepaid expenses and other assets (270) 1,854 Current liabilities (976) (122) ---------- --------- Net cash (used in) provided by operating activities (2,070) 5,887 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of marketable securities (17) (4) Purchases of property, plant and equipment and other (1,429) (1,041) --------- ---------- Net cash used for investing activities $ (1,446) $ (1,045) --------- ---------- The accompanying notes are an integral part of these consolidated statements. CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For Three Months Ended March 31, 1998 (In thousands) (UNAUDITED) (UNAUDITED) CASH FLOWS FROM FINANCING ACTIVITIES 1997 1998 ------- ------- Proceeds from issuance of common stock $ 31 $ 366 Repayments of Capital lease obligations (59) - Repayments of long-term obligations - (5,000) Borrowings from long-term obligations 2,000 - -------- -------- Net cash provided by (used in) financing activities 1,972 (4,634) -------- -------- Cumulative translation adjustment (472) (528) -------- -------- Net decrease in cash and temporary cash investments (2,016) (320) Cash and temporary cash investments, beginning of period 6,234 3,660 --------- --------- Cash and temporary cash investments, end of period $ 4,218 $ 3,340 ========= ========= SUPPLEMENTAL DISCLOSURES Cash paid for interest $ 828 $ 840 ========= ========= Cash paid (refunded) for income taxes, $ 17 $ (833) ========= ========= The accompanying notes are an integral part of these consolidated statements. CIRCON CORPORATION ------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------- MARCH 31, 1998 -------------- (In Thousands except Share Information) General - -------- The accompanying condensed consolidated financial statements include the accounts of Circon Corporation (the Company) and its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. The condensed consolidated financial statements included herein have been prepared by the Company, without audit, in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. It is suggested that these condensed consolidated financial statements be read in conjunction with the statements and notes thereto included in the Company's 10-K for the year ended December 31, 1997. The Company does not believe any recently issued accounting standards will have a material impact on its financial condition or its results of operations. (1) USSC Tender Offer ----------------- On August 1, 1996, United States Surgical Corporation ("USSC") through its wholly-owned subsidiary, USS Acquisition Corp., launched an unsolicited tender offer (the "Offer") for all of the common stock of the Company at a price of $18 per share. The Board of Directors considered the Offer and recommended that stockholders reject it so the Company could continue to pursue its strategic plan. In reaching its conclusion, the Board retained and consulted with Bear Stearns and Company as financial advisors and Wilson, Sonsini, Goodrich & Rosati as legal advisors. In addition, the Company retained The Abernathy/MacGregor Group Inc. to advise the Company on public relations matters, Corporate Investor Communications, Inc. to assist the Company in connection with communications to stockholders and William M. Mercer Incorporated to advise the Board of Directors on certain employee matters. In connection with rejecting the Offer, the Company adopted a Stockholders Right Plan and an Employee Retention Plan, both of which are the subject of a lawsuit brought by USSC against the Company and certain of its officers and directors. In addition, the Company and certain of its directors and officers are also defendants in certain class action lawsuits purportedly brought on behalf of Circon stockholders. On December 16, 1996, USSC reduced the offer to $17 per share and extended the solicitation until February 13, 1997. On February 13, 1997, the offer was again extended to June 16, 1997. On June 19, 1997, USSC modified their tender offer by lowering the price to $14.50 and reducing the number of shares to 973,174 or 7.3% of Circon's total outstanding shares. On July 15, 1997, USSC purchased 973,174 shares at $14.50 per share. On August 5, 1997, USSC launched a new tender offer for all of the common stock of the Company at a price of $16.50 per share. On October 22, 1997, USSC extended the offer of $16.50 per share until November 25, 1997. On November 25, 1997, the offer of $16.50 per share was extended until January 15, 1998. On January 15, 1998, the offer of $16.50 per share was extended until July 16, 1998. (2) Inventories ----------- Inventories include costs of materials, labor and manufacturing overhead and are priced at the lower of cost (first-in, first-out) or market. Inventories at December 31, 1997 and March 31, 1998 consist of the following: 1997 1998 ------- ------- Raw materials $ 8,559 $ 9,981 Work in process 18,309 18,923 Finished goods 11,621 11,683 ------- -------- $ 38,489 $ 40,587 ======= ======== (3) Long-Term Obligations --------------------- Long-term obligations as of December 31, 1997 and March 31, 1998 consist of the following: 1997 1998 -------- -------- Revolving credit facility $ 46,000 $ 41,000 Industrial development authority bonds due December 2, 2006 3,165 3,165 Other 24 24 -------- -------- $ 49,189 $ 44,189 Less: current maturities (390) (390) -------- --------- $ 48,799 $ 43,799 ======== ========= The Company has a five year $75,000 reducing revolving credit facility (the "Credit Facility") with a syndicate of banks which provides for direct borrowings and a maximum of $5,000 in letters of credit. The line of availability under the credit facility is reduced by $3,000 every six months and is $66,000 at March 31, 1998. The Company has the option to borrow money based upon (i) the higher of the prime rate or an adjusted federal funds rate or (ii) an adjusted Eurodollar rate. The unused portion of the Credit Facility has a commitment fee which ranges from .1875% to .375%. The Credit Facility, which expires August 1, 2001, contains certain restrictive financial covenants and is secured by substantially all of the assets of the Company. The Company has a letter of credit in the amount of approximately $3,307 as of March 31, 1998 underlying $3,165 of tax exempt Industrial Development Authority Bonds (the "Bonds") issued in December 1991 with a 15 year maturity requiring monthly interest payments and annual principal payments. The letter of credit has a renewable 5 year term and carries an annual fee of 1% of the outstanding bond principal amount. The bonds are subject to weekly repricing at an interest rate based on the remarketing agents' professional judgment and prevailing market conditions at the time. The Bonds and the letter of credit facility are collateralized by the Company's two Langhorne, Pennsylvania facilities. These facilities had a net carrying value of $4,482 as of March 31, 1998. Future principal maturities of the long term obligation are as follows: 1998 390 1999 405 2000 430 2001 41,450 2002 475 Thereafter 1,039 --------- $ 44,189 ========= (4) Comprehensive Income -------------------- Components of other comprehensive income for the Company consist of foreign currency items and that the amounts for the period ended March 31, 1998 and accumulated to date are $528 and $1,725. (5) Litigation ---------- See Discussion of Legal Proceedings in Part II, Item 1. ITEM 2. Management's Discussion and Analysis of Operations and Financial Condition Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997 Sales ----- First Quarter 1998 total sales were $36.3 million compared to $38.4 million for the prior year. Total domestic sales were $31.6 million, up from last year's $31.1 million. Sales by the U.S. sales force totaled $28.3 million compared to $28.1 million last year. International and other sales were $4.7 million compared to $7.3 million in 1997. International sales were down due to recent strengthening in the U.S. dollar, reduced health care expenditures in Pacific Rim countries, and the requirement by some European dealers for CE marking, although not legally required until June 1998. Virtually all of Circon's products received CE mark approval in April 1998. New higher performing and lower cost video systems and other products have been recently introduced to international markets. Gross Profit ------------ Gross profit as a percent of sales increased to 56.3% from 55.9% in first quarter 1997. This improvement is the result of selling price stability and reduced manufacturing overhead, coupled with manufacturing efficiency gains. Operating Expense ----------------- Operating expenses of $17.7 million are down $1.8 million or 9.3% from prior year. First quarter 1998 operating expenses were 48.7% of sales, down from 50.7% in 1997. This was due to the cost reduction programs instituted over the past year. Sales and marketing expenses have been cut 11% due to reduced sales meeting expenses, tighter controls over field inventory/samples, and general economics. General and administrative expenses were down 9.8% for the quarter, due to the closure of the German facility, reduced amortization, and other factors. Research and Development expenditures of $2.8 million were level with prior year. Income/EPS ---------- As a result of the factors discussed above, first quarter operating income of $2.8 million increased 38% over prior year's $2.0 million. Income before taxes of $1.9 million compared to $1.2 million was up 57% and net income of $1.2 million was 54% over prior year's $0.8 million. First quarter 1998 EPS was $0.09, up from last year's $0.06. Liquidity and Capital Resources Circon's financial position remains strong with working capital of $64.5 million. Circon's current ratio is 4.9:1. For the quarter, borrowings decreased by $5.0 million. Accounts Receivable decreased $2.9 million due to strong collections and lower first quarter 1998 sales compared to fourth quarter 1997. Inventory increased $2.1 million due to a build in raw materials and work-in-process for new products. Circon has a $75.0 million secured reducing revolving credit line with a syndicate of banks. The credit line reduces by $3.0 million every six months and totaled $66.0 million at March 31, 1998. There is currently $41.0 million outstanding (See Footnote 3). The Company believes that cash flow from operations, existing cash, marketable securities and available cash from bank credit facilities are adequate to fund the Company's existing operations for the foreseeable future. Year 2000 Compliance -------------------- Circon Corporation is in the process of replacing its entire internal management information system with new software and hardware which is year 2000 compliant. The project is expected to be completed by December 1998. Software provided and operated by third parties are also currently under evaluation. In addition, Circon's Manufacturing and Research and Development staffs are in the process of reviewing all manufacturing processes, manufactured products and secondary compliance issues with vendors related to the year 2000. At the present time, the Company has not identified any compliance issues that cannot be resolved within the required time frames or will have a material impact on the Company's business or financial results. Forward Looking Statements See Item 5 regarding forward looking statements in Part II and certain important cautionary statements. PART II Item 1. Legal Proceedings. On May 28, 1996, two purported stockholders of the Company, Bart Milano and Elizabeth Heaven, commenced an action in the Superior Court of the State of California for the County of Santa Barbara, Case No. 213476, purportedly on behalf of themselves and all others who purchased the Company's common stock between May 2, 1995 and February 1, 1996, against the Company, Richard A. Auhll, Rudolf R. Schulte, Harold R. Frank, John F. Blokker, Paul W. Hartloff, Jr., R. Bruce Thompson, Jon D. St. Clair, Frederick A. Miller, David P. Zielinski, Winton L. Berci, Jurgen Zobel, Trevor Murdoch and Warren G. Wood. That complaint alleged that defendants violated Sections 11 and 15 of the Federal Securities Act of 1933, as amended, Sections 25400-02 and 25500-02 of the California Corporations Code, and Sections 1709-10 of the California Civil Code, by disseminating allegedly false and misleading statements relating to Circon's acquisition of Cabot Medical Corp. by merger and to the combined companies' future financial performance. In general the complaint alleged that defendants knew that synergies from the merger would not be achieved, but misrepresented to the public that they would be achieved, in order to obtain approval for the merger so they would be executives of a much larger corporation. This alleged conduct allegedly had the effect of inflating the Company's stock price. On July 29, 1996, defendants filed demurrers to the complaint on the ground that plaintiffs' allegations fail to state facts sufficient to constitute a cause of action. On or about August 6, 1996, plaintiffs served their response to defendants' demurrers, stating their intention to file an amended complaint prior to the hearing on defendants' demurrers. On September 20, 1996, plaintiffs voluntarily dismissed Rudolf R. Schulte, Harold R. Frank, John F. Blokker and Paul W. Hartloff, Jr. from the action, without prejudice. On September 30, 1996, plaintiffs, joined by a third purported stockholder of the Company, Adam Zetter, filed a first amended complaint against the remaining defendants. Plaintiffs' amended complaint is substantially similar to the original complaint, but adds a new purported cause of action under the unfair business practices provisions of the California Business & Professions Code, Sections 17200, et seq. and 17500, et seq. Like the original complaint, the amended complaint seeks compensatory and/or punitive damages, attorneys fees and costs, and any other relief (including injunctive relief) deemed proper. On December 2, 1996, defendants filed demurrers to the amended complaint again on the grounds that plaintiffs' allegations fail to state facts sufficient to constitute a cause of action. On April 17, 1997, a hearing was held regarding the defendants demurrers to the first amended complaint. By order dated May 28, 1997, the Superior Court overruled the defendant's demurrers to the amended complaint. The parties are now engaged in discovery proceedings. The Company believes plaintiffs' allegations to be without merit and intends to vigorously defend the lawsuit. On August 15, 1996, an action captioned Steiner v. Auhll, et al., No. 15165 was filed in the Court of Chancery of the State of Delaware. Shortly thereafter, three substantially similar actions were filed by three other individuals claiming to be stockholders of Circon. All four actions allege that Circon and certain of its officers and directors breached their fiduciary duties to Circon's stockholders by taking steps to resist the hostile tender offer by U.S. Surgical Corporation announced on August 2, 1996. All four of these actions purport to be brought as class actions on behalf of all Circon stockholders. On August 16, 1996, a separate action captioned Krim v. Circon Corp., et al., No. 153767, was filed in the Superior Court of California in Santa Barbara. The plaintiff in that action also claims to be a Circon stockholder and purports to bring his claim as a class action. On September 27, 1996, that action was stayed by the Court in favor of the actions pending in Delaware; the Court also encouraged the plaintiff to refile his action in Delaware. On or about August 30, 1996, the Chancery Court consolidated the four Delaware complaints into a single action, and plaintiffs filed an amended complaint. The Company and its officers and directors filed an answer to the amended complaint on November 12, 1996. The Company believes plaintiffs' allegations to be without merit and intends to vigorously defend the lawsuits. On September 17, 1996, an action captioned U.S. Surgical Corporation v. Auhll, et al., No. 15223NC was filed in the Court of Chancery of the State of Delaware. The complaint in this action also alleges that Circon and certain of its officers and directors breached their fiduciary duties to Circon's stockholders by taking steps to resist U.S. Surgical's hostile tender offer. The Company and its officers and directors filed an answer to the complaint on November 12, 1996. On or about October 28, 1997, U.S. Surgical filed an Amended and Supplemental Complaint (the "Amended Complaint"). The Amended Complaint repeats the allegations in U.S. Surgical's September 17, 1996 complaint and adds new allegations regarding the supposed breaches of fiduciary duties by certain officers and directors of Circon since the filing of the September 17, 1996 complaint. The Company believes plaintiff's allegations to be without merit and intends to vigorously defend the lawsuit. Item 5. Additional Cautionary Statements - -------------------------------- No Assurance of Cost Savings or Revenue/Earnings Growth as provided in the Company's Strategic Plan Circon has implemented the initial phases of a comprehensive strategic plan to maximize value for shareholders that includes cost cutting and revenue/earnings growth components. Implementation and achievement of the strategic plan is critical to the success of the Company and the achievement of its corporate goals. Although the strategic plan has already begun to yield positive results, there can be no assurance that this trend will continue. The failure of the Company to achieve cost and expense reductions in accordance with the strategic plan, or the occurrence of unforeseen expenses, could adversely affect the Company's ability to achieve the goals set forth in the strategic plan. Cost cutting measures include the elimination of certain personnel, the decision to not fill several open positions, the reduction in quantities of samples provided to the sales force, and the reduction of salaries for certain senior executives. There can be no assurance that such cost cutting will not have an adverse effect on the Company's operations. The sales force has gone through a significant reorganization since the merger with Cabot Medical in 1995 and has not yet demonstrated the productivity required to achieve the goals of the strategic plan. In addition, the strategic plan provides for revenues/earnings growth which is contingent in large part on the success of both the sales force and the Company's new products, some of which have not yet been introduced to the marketplace. The failure of the sales force to achieve targeted results or of the Company's new products to be accepted in the market may have a material adverse effect on the Company's financial results and its ability to meet the goals established in the strategic plan. Disruptive Effect of Hostile Tender Offer On August 2, 1996, a subsidiary of United States Surgical Corporation ("USSC") initiated an unsolicited offer to purchase all outstanding shares of the Company's Common Stock. This tender offer has had, and may continue to have, various adverse effects on the Company's business and results of operations, including the increased susceptibility of key employees of the Company to employment offers by other companies, the risk of negative reactions among distributors, suppliers or customers to the prospect of such a change in control of the Company, the distraction of management and other key employees and the fees and other expenses of financial, legal and other advisors to the Company in responding to the tender offer and related law suits. On October 6, 1997, two individuals who were nominated by USSC to serve on the Circon Board were elected by the shareholders of the Corporation. A precatory resolution sponsored by USSC calling for the Board of Circon to arrange for the prompt sale of the Company was also approved by the shareholders. In addition, USSC filed a lawsuit in the State of Delaware which, among other things, seeks to force the Board to redeem the Shareholder Rights Plan and have the Employee Retention Plans nullified. No assurance can be given that these actions will not exacerbate one or more of the potential adverse effects mentioned above. Increasing Competition and Risk of Obsolescence from Technological Advances The markets in which Circon's products compete are characterized by continuing technical innovation and increasing competition. Some surgical procedures which utilize the Company's products could potentially be replaced or reduced in importance by alternative medical procedures or new drugs which may adversely affect Circon's business. Government Regulation The process of obtaining and maintaining required regulatory approvals is lengthy, expensive and uncertain. Although Circon has not experienced any substantial regulatory delays to date, there is no assurance that delays will not occur in the future, which could have a significant adverse effect on Circon's ability to introduce new products on a timely basis. The products to be used with the new Transvaginal Hydrolaparoscopy procedure, for example, are currently under review by the FDA and there can be no assurance that approval to market the products will be forthcoming. Regulatory agencies periodically inspect Circon's manufacturing facilities to ascertain compliance with "good manufacturing practices" and can subject approved products to additional testing and surveillance programs. Failure to comply with applicable regulatory requirements can, among other things, result in fines, suspensions of regulatory approvals, product recalls, operating restrictions and criminal penalties. While the Company believes it is currently in compliance, if Circon fails to comply with regulatory requirements, it could have an adverse effect on Circon's results of operations and financial condition. Uncertainties within the Healthcare Markets Political, economic and regulatory influences are subjecting the healthcare industry in the United States to rapid, continuing and fundamental change. Although Congress has not passed comprehensive healthcare reform legislation to date, Circon anticipates that Congress, state legislatures and the private sector will continue to review and assess alternative healthcare delivery and payment systems. Responding to increased costs and to pressure from the government and from insurance companies to reduce patient charges, healthcare providers (including customers of Circon) have demanded, and in many cases received, reduced prices on medical devices. These customers are expected to continue to demand lower prices in the future. Circon cannot predict what impact the adoption of any federal or state healthcare reform measures, private sector reform or market forces may have on its business. However, pricing pressure is expected to continue to adversely affect profit margins. Product Liability Risk Circon's products involve a risk of product liability. Although Circon maintains product liability insurance at coverage levels which it believes are adequate, there is no assurance that, if the Company were to incur substantial liability for product liability claims, insurance would provide adequate coverage against such liability. New Products Circon's growth depends in part on its ability to introduce new and innovative products that meet the needs of medical professionals. Although Circon has historically been successful at bringing new products to market, there can be no assurance that Circon will be able to continue to introduce new and innovative products or that the new products that Circon introduces, or has introduced, will be widely accepted by the marketplace. For example, there can be no assurance that Circon will be successful with its market launch of the products to be used with the new Transvaginal Hydrolaparoscopy (THL) procedure. The failure of the Company to continue to introduce new products or gain wide spread acceptance of a new product, like the products to be used with the THL procedure, could adversely affect the Company's operations. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CIRCON CORPORATION Registrant May 15, 1998 /s/Richard A. Auhll ------------ ------------------- Date RICHARD A. AUHLL President Chief Executive Officer May 15, 1998 /s/R. Bruce Thompson ------------ -------------------- Date R. BRUCE THOMPSON Executive Vice President Chief Financial Officer EX-27 2 ART. 5 FDS FOR 1ST QUATER 10-Q
5 1,000 3-MOS DEC-31-1998 MAR-31-1998 3,340 1,119 30,776 1,617 40,587 80,993 54,208 1,216 165,292 16,477 0 0 0 133 104,883 165,292 36,279 36,279 15,871 15,871 17,650 0 874 1,904 685 1,219 0 0 0 1,219 0.09 0.09
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