-----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, K89Stl4bVzbjBeDX6fCVK7jbh+h5qV60ch7OaKr6sE3KOjjro8n7UlEHt/6YUT+l Sx+uv9o8U+cIN+SAqJkZag== 0000719727-98-000003.txt : 19980817 0000719727-98-000003.hdr.sgml : 19980817 ACCESSION NUMBER: 0000719727-98-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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: 98688072 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 June 30, 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 June 30, 1998: 13,396,794 ---------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND JUNE 30,1998 ASSETS (In thousands, except per share amounts) (UNAUDITED) December 31, June 30, 1997 1998 --------- --------- CURRENT ASSETS: Cash and temporary cash investments $ 3,660 $ 2,242 Marketable securities 1,115 1,131 Accounts receivable, net of allowance of $1,606 in 1997 and $1,583 in 1998 32,024 28,142 Inventories 38,489 42,728 Prepaid expenses and other assets 3,470 2,359 Deferred income taxes 5,172 3,698 --------- --------- Total current assets 83,930 80,300 --------- --------- DEFERRED INCOME TAXES 1,289 1,289 PROPERTY, PLANT, AND EQUIPMENT, NET 53,503 52,201 OTHER ASSETS, at cost net of accumulated amortization 30,635 29,600 --------- --------- Total assets $ 169,357 $ 163,390 ========= ========= The accompanying notes are an integral part of these consolidated balance sheets. CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND JUNE 30,1998 LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands, except per share amounts) (UNAUDITED) December 31, June 30, 1997 1998 --------- --------- CURRENT LIABILITIES: Current maturities of long-term obligations $ 390 $ 390 Accounts payable 4,629 4,468 Accrued liabilities 10,892 9,837 Customer deposits 688 816 ---------- --------- Total current liabilities 16,599 15,511 ---------- --------- NONCURRENT LIABILITIES: Long-term obligations 48,799 40,299 ---------- --------- SHAREHOLDERS' EQUITY: Preferred stock: $0.01 par value 1,000,000 shares authorized, none outstanding Common stock: $0.01 par value 50,000,000 shares authorized 13,293,812 and 13,396,794 issued and outstanding in 1997 and 1998, respectively 133 134 Additional paid-in capital 105,079 106,183 Cumulative translation adjustment (1,197) (1,625) Accumulated (deficit) earnings (56) 2,888 --------- --------- Total shareholders' equity 103,959 107,580 --------- --------- Total liabilities and shareholders' equity $ 169,357 $ 163,390 ========= ========= The accompanying notes are an integral part of these consolidated balance sheets. CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Three months ended Six months ended June 30, June 30, (UNAUDITED (UNAUDITED) (UNAUDITED) (UNAUDITED) 1997 1998 1997 1998 --------- --------- --------- --------- NET SALES $ 40,455 $ 37,251 $ 78,848 $ 73,530 Cost of sales 18,673 16,434 35,600 32,305 -------- --------- --------- --------- GROSS PROFIT 21,782 20,817 43,248 41,225 OPERATING EXPENSES: Research and development 2,743 2,700 5,527 5,468 Selling, general and administrative 17,517 14,845 34,196 29,727 --------- -------- --------- --------- Total operating expenses 20,260 17,545 39,723 35,195 INCOME FROM OPERATIONS 1,522 3,272 3,525 6,030 Interest income 40 5 181 15 Interest expense (1,000) (793) (1,919) (1,667) Other income, net 115 141 106 151 --------- -------- --------- --------- INCOME BEFORE INCOME TAXES 677 2,625 1,893 4,529 Provision for income taxes 237 900 662 1,585 --------- -------- --------- --------- NET INCOME $ 440 $ 1,725 $ 1,231 $ 2,944 ========= ======== ========= ========= BASIC AND DILUTED EARNINGS PER SHARE : $ 0.03 $ 0.13 $ 0.09 $ 0.22 ======== ======== ========= ========= Weighted Average Number of Shares of Common Stock and Equivalents Outstanding BASIC 13,245 13,378 13,243 13,343 --------- -------- --------- --------- DILUTED 13,572 13,775 13,620 13,650 --------- -------- --------- --------- The accompanying notes are an integral part of these consolidated statements.
CIRCON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For Six Months Ended June 30 (In thousands) (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES 1997 1998 -------- -------- Net income $ 1,231 $ 2,944 Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation and amortization 4,272 4,306 Change in assets and liabilities: Accounts receivable (5,481) 3,882 Inventories (5,217) (4,239) Prepaid expenses and other assets 88 2,486 Accrued liabilities (1,802) (1,216) Customer deposits 205 128 --------- -------- Net cash provided by (used in) operating activities $ (6,704) $ 8,291 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases noncurrent assets (3,158) (1,886) --------- -------- Net cash used in investing activities $ (3,158) (1,886) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock 58 1,105 Borrowing (payments) of long-term obligations 5,500 (8,500) --------- ------- Net cash provided by (used in) financing activities $ 5,558 $ (7,395) --------- ------- Cumulative translation adjustment (776) (428) --------- ------- Net decrease in cash and temporary cash investments (5,080) (1,418) Cash and temporary cash investments, beginning of period 6,234 3,660 --------- ------- Cash and temporary cash investments, end of period $ 1,154 $ 2,242 ========= ======= SUPPLEMENTAL DISCLOSURES Cash paid for interest $ 1,871 $ 1,581 ========= ======= Cash paid (refunded) for income taxes, net $ 114 (765) ========= ======= The accompanying notes are an integral part of these consolidated statements. CIRCON CORPORATION ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ JUNE 30, 1998 ------------- UNAUDITED (In thousands except share information) General - ------- The accompanying consolidated financial statements include the account of Circon Corporation (the Company) and its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. The consolidated financial statements included herein have been prepared by the Company in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. It is suggested that these consolidated financial statements be read in conjunction with the statements and notes thereto included in the Company's annual report for the year ended December 31, 1997. The Company does not believe any recently issued accounting standards will have a material impact on its financial condition or its results of operations. (1) USSC Tender Offer ----------------- On August 1, 1996, United States Surgical Corporation ("USSC") through its wholly-owned subsidiary, USS Acquisition Corp., launched an unsolicited tender offer (the "Offer") for all of the common stock of the Company at a price of $18 per share. The Board of Directors considered the Offer and recommended that stockholders reject it so the Company could continue to pursue its strategic plan. In reaching its conclusion, the Board retained and consulted with Bear Stearns and Company as financial advisors and Wilson, Sonsini, Goodrich & Rosati as legal advisors. In addition, the Company retained The Abernathy/MacGregor Group Inc. to advise the Company on public relations matters, Corporate Investor Communications, Inc. to assist the Company in connection with communications to stockholders and William M. Mercer Incorporated to advise the Board of Directors on certain employee matters. In connection with rejecting the Offer, the Company adopted a Stockholders Right Plan and an Employee Retention Plan, both of which are the subject of a lawsuit brought by USSC against the Company and certain of its officers and directors. On July 15, 1998, USSC agreed to postpone the lawsuit until after Circon holds its annual meeting later in the year. In addition, the Company and certain of its directors and officers are also defendants in certain class action lawsuits purportedly brought on behalf of Circon stockholders. On December 16, 1996, USSC reduced the offer to $17 per share and extended the solicitation until February 13, 1997. On February 13, 1997, the offer was again extended to June 16, 1997. On June 19, 1997, USSC modified their tender offer by lowering the price to $14.50 and reducing the number of shares to 973,174 or 7.3% of Circon's total outstanding shares. On July 15, 1997, USSC purchased 973,174 shares at $14.50 per share. On August 5, 1997, USSC launched a new tender offer for all of the common stock of the Company at a price of $16.50 per share. On October 22, 1997, USSC extended the offer of $16.50 per share until November 25, 1997. On November 25, 1997, the offer of $16.50 per share was extended until January 15, 1998. On January 15, 1998, the offer of $16.50 per share was extended until July 16, 1998. In May 1998, USSC agreed to be acquired by Tyco International in a transaction scheduled to close later in the year. On July 16, 1998, the offer of $16.50 per share was extended until September 15, 1998. (2) Inventories ----------- Inventories include costs of materials, labor and manufacturing overhead and are priced at the lower of cost (first-in, first-out) or market. Inventories at December 31, 1997 and June 30, 1998 consist of the following: 1997 1998 --------- --------- Raw materials $ 8,559 $ 9,021 Work in process 18,309 20,328 Finished goods 11,621 13,379 --------- --------- $ 38,489 $ 42,728 ========= ========= (3) Long-Term Obligations --------------------- Long-term obligations as of December 31, 1997 and June 30, 1998 consist of the following: 1997 1998 --------- --------- Revolving credit facility $ 46,000 $ 37,500 Industrial development authority bonds due December 2, 2006 3,165 3,165 Other 24 24 ---------- --------- 49,189 40,689 Less: current maturities (390) (390) ---------- --------- $ 48,799 $ 40,299 ========== ========= The Company has a five year $75,000 reducing revolving credit facility (the "Credit Facility") with a syndicate of banks which provides for direct borrowings and a maximum of $5,000 in letters of credit. The line of availability under the credit facility is reduced by $3,000 every six months and is $63,000 at June 30, 1998. The Company has the option to borrow money based upon (i) the higher of the prime rate or an adjusted federal funds rate or (ii) an adjusted Eurodollar rate. The unused portion of the Credit Facility has a commitment fee which ranges from .1875% to .375%. The Credit Facility, which expires August 1, 2001, contains certain restrictive financial covenants and is secured by substantially all of the assets of the Company. The Company has a letter of credit in the amount of approximately $3,307 as of June 30, 1998 underlying $3,165 of tax exempt Industrial Development Authority Bonds (the "Bonds") issued in December 1991 with a 15 year maturity requiring monthly interest payments and annual principal payments. The letter of credit has a renewable 5 year term and carries an annual fee of 1% of the outstanding bond principal amount. The bonds are subject to weekly repricing at an interest rate based on the remarketing agents' professional judgment and prevailing market conditions at the time. The Bonds and the letter of credit facility are collateralized by the Company's two Langhorne, Pennsylvania facilities. These facilities had a net carrying value of $4,394 as of June 30, 1998. Future principal maturities of the long term obligation are as follows: 1998 390 1999 405 2000 430 2001 37,950 2002 475 Thereafter 1,039 -------- $ 40,689 ======== (4) Comprehensive Income Components of other comprehensive income for the Company consist of foreign currency items and the amounts for the period ended June 30, 1998 and accumulated to date are $428 and $1,625, respectively. (5) Litigation See Discussion of Legal Proceedings in Part II, Item 1. ITEM 2. Management's Discussion and Analysis of Operations and Financial Condition Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997 Sales ----- Second quarter sales were $37.3 million compared to $40.5 million for the 1997 quarter. Total domestic sales were $32.3 million compared to last year's $33.8 million. Sales by the U.S. sales force totaled $28.9 million, in the current year, compared to the prior year's $30.6 million. International and other sales were $5.0 million compared to the same 1997 period of $6.7 million. U.S. sales force sales were affected by higher than normal sales force turnover. International sales were down due to continued strengthening in the U.S. dollar and reduced health care expenditures in Pacific rim countries. Gross Profit ------------ Gross profit as a percentage of sales increased from 53.8% last year to 55.9% for the current period. This improvement is the result of sales mix and reduced manufacturing overhead coupled with manufacturing efficiency gains. However, gross profit decreased from $21.8 million in 1997 to $20.8 million in the second quarter of 1998 due to lower sales volume. Operating Expenses ------------------ Second quarter operating expenses of $17.5 million were down $2.8 million or 13.4% compared to the prior year second quarter of $20.3 million. Second quarter operating expenses were 47.1% of sales, down from 50.1% in 1997. This was due to the cost reduction programs instituted over the past year. Sales and marketing expenses have been cut 16.1% due to reduced sales meeting and convention expenses, tighter controls over field inventory/samples and other cost saving actions. General and administrative expenses are down 12.6% due to the consolidation of international facilities and reduced amortization from assets acquired from the Cabot acquisition. Research and development expenditures of $2.7 million were level with last year. Income/EPS ---------- As a result of the factors discussed above, operating income for the 2nd quarter 1998 of $3.3 million increased 115.0% over prior year's $1.5 million. Operating income grew to 8.8% of sales in 1998 versus 3.8% in 1997. Income before taxes of $2.6 million in 1998 compared to $0.7 million in 1997, was up 287.7% and net income of $1.7 million for the 2nd quarter 1998, increased 292.0% over prior year's $0.4 million. EPS was $0.13, up from last year's $0.03. Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997 Sales ----- First half sales totaled $73.5 million compared to $78.8 million for the same 1997 period. Total domestic sales were $63.9 million compared to last year's $64.9 million. Sales by the U.S. sales force were $57.3 million and international and other totaled $9.7 million compared to $58.8 million and $14.0 million, respectively, for the same 1997 period. In the third quarter, several important new product launches are scheduled, including the Dolphin Hysteroscopy pump, the Surgiflex Wave suction-irrigation probe and the initial transvaginal hydrolaparoscopy product line. These products compliment new products launched in the past six months, including the IP4.1 video camera, distortion-free 5mm and 10mm laparoscopes, and the ACNII flexible cystonephroscope. Gross Profit ------------ Gross profit as a percentage of sales for the first half of 1998 was 56.1% of sales, up from 54.8% for the first half of 1997. This increase was due to sales mix and reduced manufacturing overhead coupled with manufacturing efficiency gains. Operating Expenses ------------------ Total operating expenses of $35.2 million were down 11.4% compared to prior year's $39.7 million. Sales and marketing expenses have been cut 13.7% from last year. This was due to a combination of reduced sales meeting and convention expenditures, tighter controls over field inventory/samples and other cost saving factors. General and administrative expenses are down 11.2% for the first half due to the consolidation of international facilities and reduced amortization from assets acquired from the Cabot acquisition. Research and development expenditures have remained essentially level with last year. Income/EPS ---------- Operating income for the first half of 1998 totaled $6.0 million compared to $3.5 million due to the factors discussed above. Income before taxes of $4.5 million compared to $1.9 million was up 139.2% and net income of $2.9 million increased 139.2% over prior year's $1.2 million. EPS for the first six months of 1998 was $0.22 compared with $0.09 for 1997. Liquidity and Capital Resources Circon's financial position remains strong with working capital of $64.8 million. Circon's current ratio is 5.1:1. For the first half, borrowings decreased by $8.5 million as cash from operations was used to pay down debt. Accounts Receivable decreased $4.9 million due to strong collections and lower first half 1998 sales compared to second half of 1997. Inventory increased $4.2 million due to a build in raw materials and work-in-process for new products. Circon has a $75.0 million secured reducing revolving credit line with a syndicate of banks. The credit line reduces by $3.0 million every six months and credit availability on the line totaled $63.0 million at June 30, 1998. There is currently $37.5 million outstanding (See Footnote 3). The Company believes that cash flow from operations, existing cash, marketable securities and available cash from bank credit facilities are adequate to fund the Company's existing operations for the foreseeable future. Year 2000 Compliance -------------------- Circon Corporation is in the process of replacing its entire internal management information system with new software and hardware which is year 2000 compliant. The majority of the expenses on this project have already been incurred and total $1.7 million. The project is expected to be completed by December 1998. Software provided and operated by third parties are also currently under evaluation. In addition, Circon's Manufacturing and Research and Development staffs are in the process of reviewing all manufacturing processes, manufactured products and secondary compliance issues with significant vendors related to the year 2000 issue. At the present time, the Company has not identified any compliance issues that cannot be resolved within the required time frames or will have a material impact on the Company's business or financial results. Forward Looking Statements See Item 5 regarding forward looking statements in Part II and certain important cautionary statements. PART II Item 1. Legal Proceedings. On May 28, 1996, two purported stockholders of the Company, Bart Milano and Elizabeth Heaven, commenced an action in the Superior Court of the State of California for the County of Santa Barbara, Case No. 213476, purportedly on behalf of themselves and all others who purchased the Company's common stock between May 2, 1995 and February 1, 1996, against the Company, Richard A. Auhll, Rudolf R. Schulte, Harold R. Frank, John F. Blokker, Paul W. Hartloff, Jr., R. Bruce Thompson, Jon D. St. Clair, Frederick A. Miller, David P. Zielinski, Winton L. Berci, Jurgen Zobel, Trevor Murdoch and Warren G. Wood. That complaint alleged that defendants violated Sections 11 and 15 of the Federal Securities Act of 1933, as amended, Sections 25400-02 and 25500-02 of the California Corporations Code, and Sections 1709-10 of the California Civil Code, by disseminating allegedly false and misleading statements relating to Circon's acquisition of Cabot Medical Corp. by merger and to the combined companies' future financial performance. In general the complaint alleged that defendants knew that synergies from the merger would not be achieved, but misrepresented to the public that they would be achieved, in order to obtain approval for the merger so they would be executives of a much larger corporation. This alleged conduct allegedly had the effect of inflating the Company's stock price. On July 29, 1996, defendants filed demurrers to the complaint on the ground that plaintiffs' allegations fail to state facts sufficient to constitute a cause of action. On or about August 6, 1996, plaintiffs served their response to defendants' demurrers, stating their intention to file an amended complaint prior to the hearing on defendants' demurrers. On September 20, 1996, plaintiffs voluntarily dismissed Rudolf R. Schulte, Harold R. Frank, John F. Blokker and Paul W. Hartloff, Jr. from the action, without prejudice. On September 30, 1996, plaintiffs, joined by a third purported stockholder of the Company, Adam Zetter, filed a first amended complaint against the remaining defendants. Plaintiffs' amended complaint is substantially similar to the original complaint, but adds a new purported cause of action under the unfair business practices provisions of the California Business & Professions Code, Sections 17200, et seq. and 17500, et seq. Like the original complaint, the amended complaint seeks compensatory and/or punitive damages, attorneys fees and costs, and any other relief (including injunctive relief) deemed proper. On December 2, 1996, defendants filed demurrers to the amended complaint again on the grounds that plaintiffs' allegations fail to state facts sufficient to constitute a cause of action. On April 17, 1997, a hearing was held regarding the defendants demurrers to the first amended complaint. By order dated May 28, 1997, the Superior Court overruled the defendant's demurrers to the amended complaint. The parties are now engaged in discovery proceedings. The Company believes plaintiffs' allegations to be without merit and intends to vigorously defend the lawsuit. On August 15, 1996, an action captioned Steiner v. Auhll, et al., No. 15165 was filed in the Court of Chancery of the State of Delaware. Shortly thereafter, three substantially similar actions were filed by three other individuals claiming to be stockholders of Circon. All four actions allege that Circon and certain of its officers and directors breached their fiduciary duties to Circon's stockholders by taking steps to resist the hostile tender offer by U.S. Surgical Corporation announced on August 2, 1996. All four of these actions purport to be brought as class actions on behalf of all Circon stockholders. On August 16, 1996, a separate action captioned Krim v. Circon Corp., et al., No. 153767, was filed in the Superior Court of California in Santa Barbara. The plaintiff in that action also claims to be a Circon stockholder and purports to bring his claim as a class action. On September 27, 1996, that action was stayed by the Court in favor of the actions pending in Delaware; the Court also encouraged the plaintiff to refile his action in Delaware. On or about August 30, 1996, the Chancery Court consolidated the four Delaware complaints into a single action, and plaintiffs filed an amended complaint. The Company and its officers and directors filed an answer to the amended complaint on November 12, 1996. On July 15, 1998, plantiffs agreed to postpone further action in the case until after Circon holds its annual meeting later in the year. The Company believes plaintiffs' allegations to be without merit and intends to vigorously defend the lawsuits in the event that plaintiffs continue to pursue the matter. On September 17, 1996, an action captioned U.S. Surgical Corporation v. Auhll, et al., No. 15223NC was filed in the Court of Chancery of the State of Delaware. The complaint in this action also alleges that Circon and certain of its officers and directors breached their fiduciary duties to Circon's stockholders by taking steps to resist U.S. Surgical's hostile tender offer. The Company and its officers and directors filed an answer to the complaint on November 12, 1996. On or about October 28, 1997, U.S. Surgical filed an Amended and Supplemental Complaint (the "Amended Complaint"). The Amended Complaint repeats the allegations in U.S. Surgical's September 17, 1996 complaint and adds new allegations regarding the supposed breaches of fiduciary duties by certain officers and directors of Circon since the filing of the September 17, 1996 complaint. On July 15, 1998, U.S. Surgical agreed to postpone the lawsuit until after Circon holds its annual meeting later in the year. The Company believes plaintiff's allegations to be without merit and intends to vigorously defend the lawsuit in the event that U.S. Surgical continues to pursue the matter. Item 5. Additional Cautionary Statements - -------------------------------- No Assurance of Cost Savings or Revenue/Earnings Growth as provided in the Company's Strategic Plan. Circon has implemented the initial phases of a comprehensive strategic plan to maximize value for shareholders that includes cost cutting and revenue/earnings growth components. Implementation and achievement of the strategic plan is critical to the success of the Company and the achievement of its corporate goals. Although the strategic plan has already begun to yield positive results, there can be no assurance that this trend will continue. The failure of the Company to achieve cost and expense reductions in accordance with the strategic plan, or the occurrence of unforeseen expenses, could adversely affect the Company's ability to achieve the goals set forth in the strategic plan. Cost cutting measures include the elimination of certain personnel, the decision to not fill several open positions, the reduction in quantities of samples provided to the sales force, and the reduction of salaries for certain senior executives. There can be no assurance that such cost cutting will not have an adverse effect on the Company's operations. The sales force has gone through a significant reorganization since the merger with Cabot Medical in 1995 and has not yet demonstrated the productivity required to achieve the goals of the strategic plan. In addition, the strategic plan provides for revenues/earnings growth which is contingent in large part on the success of both the sales force and the Company's new products, some of which have not yet been introduced to the marketplace. The failure of the sales force to achieve targeted results or of the Company's new products to be accepted in the market may have a material adverse effect on the Company's financial results and its ability to meet the goals established in the strategic plan. Disruptive Effect of Hostile Tender Offer On August 2, 1996, a subsidiary of United States Surgical Corporation ("USSC") initiated an unsolicited offer to purchase all outstanding shares of the Company's Common Stock. This tender offer has had, and may continue to have, various adverse effects on the Company's business and results of operations, including the increased susceptibility of key employees of the Company to employment offers by other companies, the risk of negative reactions among distributors, suppliers or customers to the prospect of such a change in control of the Company, the distraction of management and other key employees and the fees and other expenses of financial, legal and other advisors to the Company in responding to the tender offer and related law suits. On October 6, 1997, two individuals who were nominated by USSC to serve on the Circon Board were elected by the shareholders of the Corporation. A precatory resolution sponsored by USSC calling for the Board of Circon to arrange for the prompt sale of the Company was also approved by the shareholders. In addition, USSC filed a lawsuit in the State of Delaware which, among other things, seeks to force the Board to redeem the Shareholder Rights Plan and have the Employee Retention Plans nullified. No assurance can be given that these actions will not exacerbate one or more of the potential adverse effects mentioned above. Increasing Competition and Risk of Obsolescence from Technological Advances The markets in which Circon's products compete are characterized by continuing technical innovation and increasing competition. Some surgical procedures which utilize the Company's products could potentially be replaced or reduced in importance by alternative medical procedures or new drugs which may adversely affect Circon's business. Government Regulation The process of obtaining and maintaining required regulatory approvals is lengthy, expensive and uncertain. Although Circon has not experienced any substantial regulatory delays to date, there is no assurance that delays will not occur in the future, which could have a significant adverse effect on Circon's ability to introduce new products on a timely basis. Regulatory agencies periodically inspect Circon's manufacturing facilities to ascertain compliance with "good manufacturing practices" and can subject approved products to additional testing and surveillance programs. Failure to comply with applicable regulatory requirements can, among other things, result in fines, suspensions of regulatory approvals, product recalls, operating restrictions and criminal penalties. While the Company believes it is currently in compliance, if Circon fails to comply with regulatory requirements, it could have an adverse effect on Circon's results of operations and financial condition. Uncertainties within the Healthcare Markets Political, economic and regulatory influences are subjecting the healthcare industry in the United States to rapid, continuing and fundamental change. Although Congress has not passed comprehensive healthcare reform legislation to date, Circon anticipates that Congress, state legislatures and the private sector will continue to review and alternative healthcare delivery and payment systems. Responding to increased costs and to pressure from the government and from insurance companies to reduce patient charges, healthcare providers (including customers of Circon) have demanded, and in many cases received, reduced prices on medical devices. These customers are expected to continue to demand lower prices in the future. Circon cannot predict what impact the adoption of any federal or state healthcare reform measures, private sector reform or market forces may have on its business. However, pricing pressure is expected to continue to adversely affect profit margins. Product Liability Risk Circon's products involve a risk of product liability. Although Circon maintains product liability insurance at coverage levels which it believes are adequate, there is no assurance that, if the Company were to incur substantial liability for product liability claims, insurance would provide adequate coverage against such liability. New Products Circon's growth depends in part on its ability to introduce new and innovative products that meet the needs of medical professionals. Although Circon has historically been successful at bringing new products to market, there can be no assurance that Circon will be able to continue to introduce new and innovative products or that the new products that Circon introduces, or has introduced, will be widely accepted by the marketplace. For example, there can be no assurance that Circon will be successful with its market launch of the products to be used with the new Transvaginal Hydrolaparoscopy (THL) procedure. The failure of the Company to continue to introduce new products or gain wide spread acceptance of a new product, like the products to be used with the THL procedure, could adversely affect the Company's operations. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CIRCON CORPORATION Registrant August 13, 1998 /s/Richard A. Auhll --------------- -------------------- Date RICHARD A. AUHLL President Chief Executive Officer August 13, 1998 /s/R. Bruce Thompson --------------- --------------------- Date R. BRUCE THOMPSON Executive Vice President Chief Financial Officer EX-27 2 ART. 5 FDS 2ND QUARTER 10-Q
5 1000 6-MOS DEC-31-1998 JUN-30-1998 2,242 1,131 29,725 1,583 42,728 80,300 97,058 44,857 163,390 15,511 0 0 0 134 107,446 163,390 73,530 73,530 32,305 35,195 0 0 1,667 4,529 1,585 2,944 0 0 0 2,944 .22 .22
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