-----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, Txl8JKnXjWhIGp9zbshsG9Vg27NOMEXJpOxSUC8ZrI57twks7dBu/Ckp6sCHQFDR SqYViY3YaaGEJmDnSQywOw== 0000912057-97-028305.txt : 19970819 0000912057-97-028305.hdr.sgml : 19970819 ACCESSION NUMBER: 0000912057-97-028305 CONFORMED SUBMISSION TYPE: SC 14D9 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19970818 SROS: NASD SUBJECT COMPANY: 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: SC 14D9 SEC ACT: 1934 Act SEC FILE NUMBER: 005-36096 FILM NUMBER: 97665505 BUSINESS ADDRESS: STREET 1: 6500 HOLLISTER AVE CITY: SANTA BARBARA STATE: CA ZIP: 93111 BUSINESS PHONE: 8059670404 FILED BY: 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: SC 14D9 BUSINESS ADDRESS: STREET 1: 6500 HOLLISTER AVE CITY: SANTA BARBARA STATE: CA ZIP: 93111 BUSINESS PHONE: 8059670404 SC 14D9 1 SC 14D-9 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 14D-9 Solicitation/Recommendation Statement Pursuant to Section 14(d)(4) of the Securities Exchange Act of 1934 CIRCON CORPORATION (Name of Subject Company) CIRCON CORPORATION (Name of Person(s) Filing Statement) Common Stock, $.01 par value (Title of Class of Securities) 172736 10 0 (CUSIP Number of Class of Securities) RICHARD A. AUHLL President and Chief Executive Officer Circon Corporation 6500 Hollister Avenue Santa Barbara, California 93117 (805) 685-5100 (Name, address and telephone number of person authorized to receive notice and communications on behalf of person(s) filing statement) Copy to: LARRY W. SONSINI, ESQ. Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304-1050 (415) 493-9300 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ITEM 1. SECURITY AND SUBJECT COMPANY The name of the subject company is Circon Corporation, a Delaware corporation (the "Company" or "Circon"), and the address of the principal executive offices of the Company is 6500 Hollister Avenue, Santa Barbara, California 93117. The title and the class of equity securities to which this statement relates is the Common Stock, par value $.01 per share, of the Company (the "Common Stock" or the "Shares"). ITEM 2. TENDER OFFER OF THE BIDDER This statement relates to the tender offer disclosed in a Tender Offer Statement on Schedule 14D-1, dated August 5, 1997 (the "Schedule 14D-1"), filed with the Securities and Exchange Commission (the "SEC") by United States Surgical Corporation, a Delaware Corporation ("USS") and USS Acquisition Corp. (the "Purchaser"), a Delaware corporation and wholly-owned subsidiary of USS, relating to an offer by Purchaser to purchase all outstanding Shares at a price of $16.50 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Purchaser's Offer to Purchase and related Letter of Transmittal (which together constitute the "Offer"). According to the Schedule 14D-1, the principal executive offices of each of USS and the Purchaser are located at 150 Glover Avenue, Norwalk, Connecticut 06856. ITEM 3. IDENTITY AND BACKGROUND (a) The name and business address of the Company, which is the entity filing this statement, are set forth in Item 1 above. (b) Except as described herein, to the knowledge of the Company, as of the date hereof, there are no material contracts, agreements, arrangements or understandings, or any actual or potential conflicts of interest between the Company or its affiliates and (i) the Company, its executive officers, directors or affiliates or (ii) Purchaser, USS or their respective executive officers, directors or affiliates. As a result of the Company's concern about the disruptive effects on the Company's employees of the tender offer commenced by USS and the Purchaser in August 1996 (the "Original Offer"), the Company retained the independent consulting firm of William M. Mercer, Incorporated ("Mercer") to advise the Board of Directors of the Company (the "Board") and to evaluate the possibility of implementing an employee retention program. Pursuant to a recommendation from the Board's Compensation Committee, the Board authorized the Company to implement three separate plans (collectively, the "Plans") to assist the Company in retaining skilled employees, including plans for executives, the Company's sales force, and managers, professionals and key contributors. The purpose of the Plans is to retain certain key employees of the Company during times of uncertainty, and to keep such persons focused on their jobs and the business of the Company during such times so that the Company can continue to execute its strategic plan. Mercer assisted and advised the Board and its Compensation Committee in formulating the terms of each Plan. Each Plan is summarized below. Each of the summaries is qualified in its entirety by reference to the full text of each of the Plans; a copy of each of the Management Retention Plan, the Sales Force Retention Plan and the Managers, Professionals and Key Contributors Retention Plan, is filed as Exhibit 1, 2, and 3, respectively, to this statement, and is incorporated by reference herein. MANAGEMENT RETENTION PLAN The Management Retention Plan (the "Management Plan") provides retention and severance benefits for designated executive officers, vice presidents and senior managers of the Company. There are three components to the Management Plan: (i) retention/severance payments, (ii) post-employment coverage under the Company's group health and life insurance plans, and (iii) pro-rated annual target bonus payments. RETENTION/SEVERANCE PAYMENTS The total potential retention/severance payment is based on a multiple of annual target bonus and/or annual base salary, with the level of payment related to the participant's job level. The multiplier ranges from 75% of annual base salary up to 250% of annual base salary and annual target bonus. ITEM 3. IDENTITY AND BACKGROUND (CONTINUED) The retention payment component is equal to either one-third of the total cash payment (for executive officers) or one-sixth of the total cash payment (for vice-presidents and senior managers). It will be paid ninety days following a change of control of the Company if the participant has remained employed by the Company or the acquiring entity through such period. The retention payment is also triggered if a participant is involuntarily terminated without cause or is constructively terminated following a change of control but prior to ninety days following a change of control. The severance payment component is equal to either two-thirds of the total cash payment (for executive officers) or five-sixths of the total cash payment (for vice-presidents and senior managers). It will be paid only if the participant is involuntarily terminated without cause or is constructively terminated within twenty-four months (for executive officers and vice-presidents) or twelve months (for senior managers) following a change of control. POST-EMPLOYMENT BENEFITS In the event of an involuntary termination without cause or constructive termination within twelve or twenty-four months following a change of control, the participant (and, if covered prior to the change of control, his or her dependents) receives continued group health, dental and life insurance coverage. The Company is required to pay the same percentage of the related insurance premiums as were paid prior to the change of control. The Company continues to make these premium payments for a period ranging from nine months to two and one-half years (depending on the participant's job level), or, if earlier, until the participant becomes covered under comparable benefit plans of another employer. PRORATED ANNUAL TARGET INCENTIVE BONUS Under the Management Plan, executive officers and vice-presidents (but not senior managers) are eligible to be paid their prorated annual target bonus for the year in which the change of control occurs. This payment is in lieu of any bonus otherwise payable under the annual incentive plan. The proration is made by multiplying the annual target bonus by a fraction, the numerator of which is the number of days in the Company's fiscal year that have elapsed prior to the change of control and the denominator of which is three hundred and sixty-five. The pro-rated bonus is paid to those executive officers and vice-presidents who remain employed until the last day of the fiscal year in which the change of control occurs or who are involuntarily terminated without cause or are constructively terminated prior to the end of the fiscal year, but following a change of control. GOLDEN PARACHUTE EXCISE TAX AND NON-DEDUCTIBILITY In general, benefits and payments under the Management Plan are subject to reduction, if, in the opinion of the Company's independent accountants, the golden parachute excise tax and non-deductibility provisions of the Internal Revenue Code would otherwise be triggered. In such event, a participant's benefits will be reduced to the largest amount that would not trigger the golden parachute excise tax and non-deductibility provisions. In the case of the Company's chief executive officer, benefits under the Management Plan are only reduced to avoid triggering the golden parachute excise tax and non-deductibility provisions if so doing would maximize the after-tax economic benefit to the chief executive officer, as determined by the Company's independent accountants. SALES FORCE RETENTION PLAN The Sales Force Retention Plan (the "Sales Force Plan") provides retention and severance benefits for all territory managers and sales video specialists who are not on Company probation at the time of a change of control. It provides for a maximum payment of twice the compensation earned in the last two full calendar months preceding the change of control. Compensation is defined for this purpose as travel allowance, bonus and commissions. The retention payment component is equal to the compensation earned in the last two full calendar months preceding the change of control. It will be paid ninety days following a change of 2 ITEM 3. IDENTITY AND BACKGROUND (CONTINUED) control if the participant has remained employed by the Company or the acquiring entity through such period. The retention payment is also triggered if a participant is involuntarily terminated without cause following a change of control but prior to ninety days following such change of control. The severance payment component is also equal to the compensation earned in the last two full calendar months preceding the change of control. It will be paid only if the participant is involuntarily terminated without cause within twelve months following a change of control. MANAGERS, PROFESSIONALS AND KEY CONTRIBUTORS RETENTION PLAN The Managers, Professionals and Key Contributors Retention Plan (the "Managers Plan") provides retention and severance benefits for managers, professionals and key contributors. It provides for a potential cash payment of a minimum of three months' base salary up to a maximum of one year's base salary. Between these minimum and maximum limits, the Managers Plan provides for two weeks' base salary for each full year of employment with the Company (or with an entity acquired by the Company) up to and including the date of a change of control. The retention payment component is equal to one-third of the total potential cash payment. It will be paid ninety days following a change of control if the participant has remained employed by the Company or the acquiring entity through such period. The retention payment is also triggered if a participant is involuntarily terminated without cause following a change of control but prior to ninety days following a change of control. The severance payment component is equal to two-thirds of the total potential cash payment. It will be paid only if the participant is involuntarily terminated without cause within twelve months following a change of control. INDEMNITY AND LIMITATION OF LIABILITY Section 145 of Delaware General Corporation Law authorizes a court to award, or a corporation's Board of Directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Act"). In accordance with Delaware Law, Article Ninth of the Certificate of Incorporation of the Company, as amended, eliminates the personal liability of a directors of the Company and its stockholders for monetary damages for breaches of fiduciary duty as a director. A copy of Article Ninth is filed as Exhibit 4 to this statement and is incorporated by reference herein. Subject to certain limitations, Article V of the Bylaws of the Company also provides for indemnification of officers and directors of the Company. A copy of Article V is filed as Exhibit 5 to this statement and is incorporated herein by reference. In addition, the Company has entered into indemnification agreements with its officers and directors by which the Company provides such persons with the maximum indemnification allowed under applicable law. These agreements also resolve certain procedural and substantive matters which are not covered, or are covered in less detail, in the Company's Certificate of Incorporation. A copy of the form of such indemnification agreement is filed as Exhibit 6 to this statement and is incorporated herein by reference. ITEM 4. THE SOLICITATION OR RECOMMENDATION (a) The Board has determined that the best means for providing value to its stockholders is for the Company to continue to pursue its strategic plan and not to be put up for sale at this time. The Board has unanimously concluded that the Offer is inadequate and not in the best interests of the Company and its stockholders. In particular, the Board has determined that the Company's strategic plan offers the potential for greater long-term benefits for the Company's stockholders than the Offer based on, among other things, greater opportunities for business expansion, revenue and earnings growth, as well as benefits resulting from the Company's recently adopted expense reduction plan. 3 ITEM 4. THE SOLICITATION OR RECOMMENDATION (CONTINUED) ACCORDINGLY, THE BOARD UNANIMOUSLY RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS REJECT THE OFFER AND NOT TENDER THEIR SHARES PURSUANT TO THE OFFER. A copy of a letter to stockholders communicating the Board's recommendation and a form of press release announcing such recommendation are filed as Exhibits 7 and 8 hereto, respectively, and are incorporated herein by reference. (b) In reaching the conclusions referred to in Item 4(a), the Board took into account numerous factors, including but not limited to the following: (i) The Board's familiarity with the business, financial condition, prospects and current business strategy of the Company, the nature of the business in which the Company operates and the Board's belief that the Offer does not reflect the long-term values inherent in the Company. In this regard, the Board particularly considered the following: - The Company's reputation as a provider of quality products and services and its position in its industry as a technological leader and innovator. - The market share of the Company in the urology and gynecology markets and new products planned for introduction in the future. - The expected growth rates of the markets for urological and gynecological products and the product position of the Company in such markets. - The Company's long-term sales plan, including the effects of products under development and enhancements to current products. - The expected effects of the Company's recently implemented expense reduction plan. - The risks inherent in achieving the Company's business plan. (ii) The Company's prospects for future growth and profitability, based on the Company's strategic plan and expense reduction plan, the various strategic initiatives which have been implemented and investments that have been made over the past several years, including the acquisition of Cabot Medical Corporation, and other opportunities that will be available in the future, the availability in the future of certain new products and enhancements to current products in various stages of development, and current conditions in the businesses in which the Company operates. (iii) The opinion of Bear, Stearns & Co. Inc. ("Bear Stearns") to the effect that the consideration offered pursuant to the Offer is inadequate, from a financial point of view, to the stockholders of the Company (excluding USS and its affiliates). The full text of the written opinion of Bear Stearns, dated August 15, 1997, which sets forth the assumptions made, matters considered and limitations on the review undertaken, is attached hereto as Exhibit 9 and is incorporated herein by reference. Holders of the Common Stock are urged to read the opinion carefully in its entirety. The opinion of Bear Stearns is directed to Circon's Board of Directors, relates only to the adequacy of the consideration offered pursuant to the Offer from a financial point of view and does not constitute a recommendation to any stockholder as to whether such stockholder should tender Shares pursuant to the Offer. The summary of the opinion of Bear Stearns set forth in this Schedule 14D-9 is qualified in its entirety by reference to the full text of such opinion. (iv) The Board's commitment to protecting the best interests of the Company's stockholders. (v) The disruptive effect of the Offer on the Company's employees, suppliers and customers. (vi) The numerous conditions to which the Offer is subject. 4 ITEM 4. THE SOLICITATION OR RECOMMENDATION (CONTINUED) The Offer is conditioned upon, among other things, the acquisition of Shares pursuant to the Offer and the proposed merger following the Offer having been approved pursuant to Section 203 of the Delaware General Corporation Law ("Section 203") or the Purchaser being satisfied in its sole discretion that Section 203 is otherwise inapplicable to the acquisition of Shares pursuant to the Offer and the proposed merger. In light of the Board's decision discussed above, the Board has determined to take no action which would render Section 203 so inapplicable. In view of the wide variety of factors considered in connection with its evaluation of the Offer, the Board did not find it practicable to, and did not, quantify or otherwise attempt to assign relative weights to the specific factors considered in reaching its respective determinations. ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED (a) Pursuant to a letter agreement dated August 8, 1996 (the "Letter Agreement"), the Company engaged Bear Stearns to perform certain financial and advisory services in connection with the Original Offer and the Offer. For such services the Company agreed to pay Bear Stearns a retainer fee of $175,000 as well as a fee of $300,000 for its opinion requested by the Company, and an additional fee of $300,000 for any additional opinion with respect to a transaction that is approved by the Board (the $175,000 and both of the $300,000 fees are credited against the fees described below). If during the term of the Letter Agreement the Company sells all or substantially all of its assets to, or an aggregate of 50% or more of the outstanding Common Stock is acquired by, any person or group of persons in one or a series of transactions, then the Company is obligated to pay Bear Stearns an amount equal to 1.0% of the Equity Consideration (as defined below) paid to the Company's stockholders. In addition, upon the occurrence, within one year following the date of termination of the Letter Agreement, of any event described in the foregoing sentence or the execution of an agreement with respect to such an event, if the event or agreement is with a third party who has made an Acquisition Proposal (as defined below) or who has been furnished non-public information by the Company or Bear Stearns, then the Company is obligated to pay Bear Stearns the fee described in the foregoing sentence. If the Company consummates a restructuring or recapitalization, then it shall pay Bear Stearns an additional fee of $1,500,000. If there is no Acquisition Proposal by August 8, 1998 (the "Termination Date"), the Company is obligated to pay Bear Stearns $1,500,000. Notwithstanding the foregoing, the Company may elect to pay Bear Stearns $1,500,000 regardless of whether there is an Acquisition Proposal at any time prior to the Termination Date, in which event the Letter Agreement will terminate. The fee described in this paragraph is payable only once and will be deducted from any payments made pursuant to the fourth sentence of this Item 5(a). "Equity Consideration" means the consideration per share of Common Stock paid to the Company's stockholders multiplied by the number of shares of Common Stock outstanding on a fully diluted basis. Equity Consideration will be determined as if any acquisition described above were of 100% of the outstanding shares of Common Stock on a fully diluted basis; provided, however, in the event that the acquisition involves the sale of all or substantially all of the assets of the Company, then the Equity Consideration will equal the sum of (i) the total amount received by the Company upon consummation of the sale; and (ii) the total amount of the Company's indebtedness assumed by or otherwise transferred to the purchaser. "Acquisition Proposal" means (i) any tender or exchange offer which if consummated would result in any person beneficially owning 50% or more of the Company's securities ("Tender Offer"), or (ii) any publicly proposed or publicly disclosed proposal or offer relating to (A) any direct or indirect acquisition or purchase of 50% or more of either the Company's securities or the assets of the Company, (B) any Tender Offer or (C) any merger, consolidation or business combination involving the Company or (iii) any "solicitation" of "proxies" (as such terms are defined in Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended) with respect to the voting of, or granting of a consent with respect to, any capital stock of the Company. 5 ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED (CONTINUED) Pursuant to the Letter Agreement, the Company agreed to indemnify Bear Stearns against all liability resulting from the performance of Bear Stearns' duties under such agreement, except for liability resulting from the gross negligence or willful misconduct of Bear Stearns. The Company has also agreed to reimburse Bear Stearns periodically for their reasonable out-of-pocket expenses, including the reasonable fees and disbursements of their attorneys arising in connection with any matter referred to in the Letter Agreement. The Letter Agreement may be terminated at any time by either party thereto, in which event Bear Stearns will be entitled to any compensation earned by it up to the date of the termination or completion, including the reimbursement of all reasonable expenses incurred by Bear Stearns. (b) The Company has retained The Abernathy/MacGregor Group Inc. as a public relations advisor in connection with the Offer and has retained Corporate Investor Communications, Inc. to assist the Company in connection with communications with stockholders and to provide other services in connection with the Offer. The Company will pay The Abernathy/MacGregor Group Inc. and Corporate Investor Communications, Inc. reasonable and customary fees for their services, reimburse them for their reasonable expenses and provide customary indemnities. Except as described above, neither the Company nor any person acting on its behalf has retained any other person to make solicitations or recommendations to security holders on its behalf concerning the Offer. ITEM 6. PRESENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES (a) To the Company's knowledge, no transaction in the Shares has been effected during the past 60 days by the Company or any executive officer, director, affiliate or subsidiary of the Company. (b) To the Company's knowledge, none of the Company's executive officers, directors, affiliates and subsidiaries presently intends to tender Shares which are held of record or beneficially owned by them pursuant to the Offer. ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY No negotiation is presently underway by the Company in response to the Offer which relates to or would result in (1) an extraordinary transaction, such as a merger or reorganization, involving the Company or any of its subsidiaries; (2) a purchase, sale or transfer of a material amount of assets by the Company or any of its subsidiaries; (3) a tender offer for or other acquisition of securities by or of the Company; or (4) any material change in the present capitalization or dividend policy of the Company. Notwithstanding the foregoing, the Board may in the future engage in negotiations in response to the Offer that could have one of the effects specified in the preceding paragraph. The Board has determined that disclosure with respect to the parties to, and the possible terms of, any transactions or proposals of the type referred to in the preceding paragraph might jeopardize any discussions or negotiations that the Company may conduct. Accordingly, the Board has instructed management not to disclose the possible terms of any such transactions or proposals, or the parties thereto, unless and until an agreement in principle relating thereto has been reached or, upon the advice of counsel, as may otherwise be required by law. Other than as set forth above, there is no transaction, board resolution, agreement in principle or signed contract in response to the tender offer, which relates to or would result in (1) an extraordinary transaction, such as a merger or reorganization, involving the Company or any of its subsidiaries; (2) a purchase, sale or transfer of a material amount of assets by the Company or any of its subsidiaries; (3) a tender offer for or other acquisition of securities by or of the Company; or (4) any material change in the present capitalization or dividend policy of the Company. 6 ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED Not Applicable. ITEM 9. MATERIAL TO BE FILED AS EXHIBITS Exhibit 1 Management Retention Plan Exhibit 2 Sales Force Retention Plan Exhibit 3 Managers, Professionals and Key Contributors Retention Plan Exhibit 4 Article Ninth of Certificate of Incorporation, as amended Exhibit 5 Article V of the Bylaws Exhibit 6 Form of Indemnification Agreement Exhibit 7* Letter to Stockholders regarding Board's Recommendation Exhibit 8 Press Release Announcing Board's Recommendation Exhibit 9 Opinion of Bear, Stearns & Co. Inc.
- ------------------------ * Included in copy mailed to stockholders 7 SIGNATURE After reasonable inquiry and to the best of its knowledge and belief, the undersigned certifies that the information set forth in this statement is true, complete and correct. Dated: August 17, 1997 CIRCON CORPORATION By: /s/ Richard A. Auhll ------------------------------------------- Richard A. Auhll PRESIDENT AND CHIEF EXECUTIVE OFFICER
8 EX-1 2 EXH 1 - MANAGEMENT RETENTION PLAN Exhibit 1 CIRCON CORPORATION MANAGEMENT RETENTION PLAN Introduction It is expected that Circon Corporation (the "Company") from time to time will consider the possibility of an acquisition by another company or other change of control. The Board of Directors of the Company (the "Board") recognizes that such consideration can be a distraction to key employees and can cause such employees to consider alternative employment opportunities. The Board has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication and objectivity of these employees, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes that it is in the best interests of the Company and its stockholders to provide these employees with an incentive to continue their employment and to motivate these employees to maximize the value of the Company upon a Change of Control for the benefit of its stockholders. The Board believes that it is imperative to provide these employees with (i) certain retention benefits payable upon remaining in the employ of the Company for a specified period following a Change of Control, and (ii) certain severance benefits upon termination of employment following a Change of Control. These benefits provide these employees with enhanced financial security and provide efficient incentive and encouragement to these employees to remain with the Company notwithstanding the possibility or occurrence of a Change of Control. Accordingly, the following plan has been developed and adopted. ARTICLE I ESTABLISHMENT OF PLAN 1. ESTABLISHMENT OF PLAN. As of the Effective Date, the Company hereby establishes a management retention plan to be known as the "Management Retention Plan" (the "Plan"), as set forth in this document. The purposes of the Plan are as set forth in the Introduction. 2. APPLICABILITY OF PLAN. Subject to the terms of this Plan, the benefits provided by this Plan shall be available to those Employees of the Company who, on or after the Effective Date, receive a Notice of Participation. 3. CONTRACTUAL RIGHT TO BENEFITS. Subject to the terms of this Plan, this Plan and the Notice of Participation establishes and vests in each Participant a contractual right to the benefits to which he or she is entitled pursuant to the terms thereof, enforceable by the Participant against the Company. ARTICLE II DEFINITIONS AND CONSTRUCTION 1. DEFINITIONS. Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the term is capitalized. (a) ANNUAL COMPENSATION. "Annual Compensation" shall mean an amount equal to the sum of (i) the Participant's Company annual base salary as in effect immediately preceding the Change of Control, and if so specified in the Participant's Notice of Participation, (ii) the Participant's 100% Target Bonus amount for the Company's fiscal year in which the Change of Control occurs. (b) CAUSE. "Cause" shall mean (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. (c) CHANGE OF CONTROL. "Change of Control" shall mean the occurrence of any of the following events: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities 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 -2- 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. (d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended. (e) COMPANY. "Company" shall mean Circon Corporation, any subsidiary corporations, any successor entities as provided in Article IX hereof, and any parent or subsidiaries of such successor entities. (f) DISABILITY. "Disability" shall mean that the Participant has been unable to perform his duties as an Employee as the result of incapacity due to physical or mental illness, and such inability, at least 26 weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Participant or the Participant's legal representative (such agreement as to acceptability not to be unreasonably withheld). Termination resulting from Disability may only be effected after at least 30 days' written notice by the Company of its intention to terminate the Participant's employment. In the event that the Participant resumes the performance of substantially all of his duties hereunder before the termination of his employment becomes effective, the notice of intent to terminate shall automatically be deemed to have been revoked. (g) EFFECTIVE DATE. "Effective Date" shall mean the date the Plan is approved by the Board. (h) EMPLOYEE. "Employee" shall mean an individual employed by the Company. (i) ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. (j) HEALTH CARE CONTINUATION PERIOD. "Health Care Continuation Period" shall mean the period set forth in a Participant's Notice of Participation. (k) INVOLUNTARY TERMINATION. "Involuntary Termination" shall mean (i) without the Participant's express written consent, the significant reduction of the Participant's duties or responsibilities relative to the Participant's duties or responsibilities in effect immediately prior to such reduction; provided, however, that a reduction in duties or responsibilities solely by virtue of the Company being acquired and made part of a larger entity (as, for example, when the Chief Financial Officer of Circon remains as such following a Change of Control and is not made the Chief Financial Officer of the acquiring corporation) shall not constitute an "Involuntary Termination;" (ii) a reduction by the Company in the annual base salary or in the maximum dollar amount of potential annual cash bonuses relative to the annual base salary and maximum dollar amount of potential annual -3- cash bonuses as in effect immediately prior to such reduction; (iii) a material reduction by the Company in the kind or level of employee benefits to which the Participant is entitled immediately prior to such reduction with the result that the Participant's overall benefits package is significantly reduced; (iv) the relocation of the Participant to a facility or a location more than 35 miles from the Participant's then present location, without the Participant's express written consent; (v) any purported termination of the Participant by the Company which is not effected for Disability or for Cause; or (vi) the failure of the Company to obtain the assumption of this agreement by any successors contemplated in Article IX below. (l) NOTICE OF PARTICIPATION. "Notice of Participation" shall mean an individualized written notice of participation in the Plan from an authorized Employee of the Company. (m) PARTICIPANT. "Participant" shall mean an individual who meets the eligibility requirements of Article III. (n) PLAN. "Plan" shall mean this Circon Corporation Management Retention Plan. (o) PRO-RATED BONUS AMOUNT. "Pro-Rated Bonus Amount" shall mean, with respect to each Participant designated as eligible to receive such a payment in their Notice of Participation, 100% of such Participant's Target Bonus as in effect for the fiscal year in which the Change of Control occurs, pro-rated by multiplying such bonus amount by a fraction, the numerator of which shall be the number of days prior to occurrence of the Change of Control during such fiscal year, and the denominator of which shall be three-hundred and sixty- five. (p) RETENTION PAYMENT. "Retention Payment" shall mean the payment of retention compensation as provided in Article VI hereof. (q) RETENTION PAYMENT PERCENTAGE. "Retention Payment Percentage" shall mean, for each Participant, the Retention Payment Percentage set forth in such Participant's Notice of Participation. (r) SEVERANCE PAYMENT. "Severance Payment" shall mean the payment of severance compensation as provided in Article IV hereof. (s) SEVERANCE PAYMENT PERCENTAGE. "Severance Payment Percentage" shall mean, for each Participant, the Severance Payment Percentage set forth in such Participant's Notice of Participation. (t) SEVERANCE WINDOW PERIOD. "Severance Window Period" means the period, not to exceed twenty-four (24) months, set forth in a Participant's Notice of Participation. -4- (u) TARGET BONUS. "Target Bonus" shall mean the target incentive bonus award relating to the achievement of the Participant's target specified under the Company's formal annual incentive bonus plan. ARTICLE III ELIGIBILITY Each Employee who is designated by the Board and who signs and timely returns to the Company a Notice of Participation shall be a Participant in the Plan. A Participant shall cease to be a Participant in the Plan when he or she ceases to be an Employee, unless such Participant is entitled to benefits hereunder. A Participant entitled to benefits hereunder shall remain a Participant in the Plan until the full amount of the benefits have been delivered to the Participant. ARTICLE IV SEVERANCE BENEFITS 1. RIGHT TO SEVERANCE BENEFITS. (a) TERMINATION FOLLOWING A CHANGE OF CONTROL. If a Participant's employment terminates at any time within the Participant's Severance Window Period after a Change of Control, then, subject to Article VII hereof, the Participant shall be entitled to receive severance benefits as follows: (i) SEVERANCE PAY UPON INVOLUNTARY TERMINATION WITHIN NINETY DAYS FOLLOWING A CHANGE OF CONTROL. If the Participant's employment is terminated as a result of Involuntary Termination other than for Cause within ninety (90) days following a Change of Control, then the Participant shall be entitled to receive a Severance Payment which equals (i) the product obtained by multiplying the Participant's Severance Payment Percentage times the Participant's Annual Compensation, plus (ii) the product obtained by multiplying the Retention Payment Percentage times the Participant's Annual Compensation, plus (iii) if and only if (A) the Participant's Notice of Participation designates him or her as eligible to receive a Pro-Rated Bonus Amount, and (B) no Pro-Rated Bonus Amount has been paid to such Participant pursuant to Article V, the Pro-Rated Bonus Amount. EXAMPLE: A Change of Control is consummated on June 15, 1997. Participant is Involuntarily Terminated other than for Cause as of July 1, 1997. Participant's Annual Compensation is $150,000. The Severance Payment Percentage set forth in the Participant's Notice of Participation is 100%. The Retention Payment Percentage set forth in the Participant's Notice of Participation is 50%. Participant's Notice of Participation designates him as eligible to receive a Pro-Rated Bonus Amount. Participant's Notice of Participation designates a twelve-month Severance Window Period. The Company's fiscal year is the -5- calendar year and therefore no Pro-Rated Bonus Amount has been paid pursuant to Article V of the Plan. The Participant's 100% Target Bonus is $30,000. The Participant is entitled to a Severance Payment equal to (i) 100% x $150,000, plus (ii) 50% x $150,000, plus (iii) (166/365) x $30,000 = $238,644. (ii) SEVERANCE PAY UPON INVOLUNTARY TERMINATION ON OR AFTER NINETY DAYS FOLLOWING A CHANGE OF CONTROL. If the Participant's employment is terminated as a result of Involuntary Termination other than for Cause on or after ninety (90) days following a Change of Control, then the Participant shall be entitled to receive a Severance Payment which equals (i) the product obtained by multiplying the Participant's Severance Payment Percentage times the Participant's Annual Compensation, plus (ii) if and only if (A) the Participant's Notice of Participation designates him or her as eligible to receive a Pro-Rated Bonus Amount, and (B) no Pro-Rated Bonus Amount has been paid to such Participant pursuant to Article V, the Pro-Rated Bonus Amount. EXAMPLE: A Change of Control is consummated on June 15, 1997. Participant is Involuntarily Terminated Other than for Cause as of October 1, 1997. Participant's Annual Compensation is $150,000. The Severance Payment Percentage set forth in the Participant's Notice of Participation is 100%. Participant's Notice of Participation designates him as eligible to receive a Pro-Rated Bonus Amount. Participant's Notice of Participation designates a twelve-month Severance Window Period. The Company's fiscal year is the calendar year and therefore no Pro-Rated Bonus Amount has been paid pursuant to Article V of the Plan. The Participant's 100% Target Bonus is $30,000. The Participant is entitled to a Severance Payment equal to (i) 100% x $150,000, plus (ii) (166/365) x $30,000 = $163,644. (iii) CONTINUED EMPLOYEE BENEFITS UPON INVOLUNTARY TERMINATION FOLLOWING A CHANGE OF CONTROL. If the Participant's employment is terminated as a result of Involuntary Termination other than for Cause, then the Participant shall receive health, dental and life insurance coverage at the same level of coverage as was provided to such Participant immediately prior to the Change of Control, with the same percentage of the premiums for such insurance coverage paid for by the Company as was paid for by the Company on behalf of such Participant immediately prior to the Change of Control (together with the benefits provided pursuant to the following sentence, the "Company-Paid Coverage"). If such coverage included the Participant's dependents immediately prior to the Change of Control, then such dependents shall also be covered under the same terms as set forth in the preceding sentence. Company-Paid Coverage shall continue until the earlier of (i) the Health Care Continuation Period, or (ii) the date that the Participant and his or her covered dependents become covered under another employer's health, dental and life insurance plans providing comparable benefits and levels of coverage. For purposes of Title X of the Consolidated Budget Reconciliation Act of 1985 ("COBRA"), the date of the "qualifying event" for Participant and his or her covered dependents shall be the date upon which Company-Paid Coverage terminates. Company-Paid Coverage shall be provided under either, at the Company's discretion, (i) the Company's plans, or (ii) no less favorable plans or arrangements secured by the Company. -6- (iv) VOLUNTARY RESIGNATION; TERMINATION FOR CAUSE. If the Participant's employment terminates by reason of the Participant's voluntary resignation (and is not an Involuntary Termination), or if the Participant is terminated for Cause, then the Participant shall not be entitled to receive severance benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and policies at the time of such termination other than under this Plan. (v) DISABILITY; DEATH. If the Company terminates the Participant's employment as a result of the Participant's Disability, or such Participant's employment is terminated due to the death of the Participant, then the Participant shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and policies at the time of such Disability or death; provided, however, that Participant shall still be eligible to receive a Retention Payment pursuant to the terms of Article VI. (b) TERMINATION APART FROM CHANGE OF CONTROL. In the event that a Participant's employment is terminated for any reason, either prior to the occurrence of a Change of Control or after the twenty-four (24)-month period following a Change of Control, then the Participant shall be entitled to receive severance benefits only as may then be established under the Company's existing severance and benefit plans and policies at the time of such termination other than this Plan. 2. TIMING OF SEVERANCE PAYMENTS. Any Severance Payment to which a Participant is entitled shall be paid by the Company in a lump sum within ten (10) business days after the Participant's termination date. ARTICLE V PRO-RATED BONUS AMOUNT PAYMENTS 1. RIGHT TO PRO-RATED BONUS AMOUNT PAYMENTS. If a Participant (i) is designated as eligible to receive a Pro-Rated Bonus Amount in his or her Notice of Participation, and (ii) remains employed by the Company through the last day of Circon Corporation's fiscal year in which a Change of Control occurs, then, subject to Article VII hereof, the Participant shall be entitled to receive the Pro-Rated Bonus Amount. EXAMPLE: Participant's Notice of Participation designates him as eligible to receive a Pro-Rated Bonus Payment Amount. The Company's fiscal year is the calendar year. A Change of Control is consummated on June 15, 1997. Participant remains employed with the Company through December 31, 1997. Participant's 100% Target Bonus is $30,000. The Participant is entitled to a Pro-Rated Bonus Amount payment equal to (166/365) x $30,000 = $13,644. -7- 2. TIMING OF PRO-RATED BONUS AMOUNT PAYMENTS. Any Pro-Rated Bonus Amount to which a Participant is entitled shall be paid by the Company in a lump sum within ten (10) business days after the last day of Circon Corporation's fiscal year in which a Change of Control occurs. 3. PRO-RATED BONUS AMOUNT PAYMENTS IN LIEU OF TARGET BONUS OTHERWISE PAYABLE. The payment of any Pro-Rated Bonus Amount under this Article V or as part of a Severance Payment under Article IV shall replace in its entirety and be in lieu of any payment to the Participant under the Company's annual incentive bonus plan for the year in which a Change of Control occurs, except for any payments under bonus plans adopted by the Company following a Change of Control. ARTICLE VI RETENTION PAYMENTS 1. RIGHT TO RETENTION PAYMENTS. If (i) a Participant remains employed by the Company for ninety (90) days after a Change of Control, (ii) a Participant's employment with the Company is terminated due to the death or Disability of the Participant following a Change of Control but prior to ninety days after a Change of Control, then, subject to Article VII hereof, the Participant shall be entitled to receive a Retention Payment equal to the product obtained by multiplying the Participant's Retention Payment Percentage times the Participant's Annual Compensation. EXAMPLE: A Change of Control is consummated on June 15, 1997. Participant remains employed with the Company for ninety (90) days following the Change of Control. Participant's Annual Compensation is $150,000. The Retention Payment Percentage set forth in the Participant's Notice of Participation is 50%. The Participant is entitled to a Retention Payment equal to 50% x $150,000 = $75,000. 2. TIMING OF RETENTION PAYMENTS. Any Retention Payment to which a Participant is entitled shall be paid by the Company in a lump sum within ten (10) business days after the ninetieth (90th) day after a Change of Control. ARTICLE VII GOLDEN PARACHUTE EXCISE TAX AND NON-DEDUCTIBILITY LIMITATIONS Except if specifically otherwise set forth in a Participant's Notice of Participation, in the event that the benefits under this Plan, when aggregated with any other payments or benefits received by a Participant, would (i) constitute "parachute payments" within the meaning of Section 280G of the Code and (ii) but for this Article VII, would be subject to the excise tax imposed by Section 4999 of the Code, then the Participant's Plan benefits shall be reduced to such lesser amount or degree as would result in no portion of such benefits being subject to excise tax under Section 4999 of the Code. Unless the Company and the Participant otherwise agree in writing, any determination required under this Article VII shall be made in writing by the same firm of independent public -8- accountants who were employed by the Company immediately prior to the Change of Control (the "Accountants"), whose determination shall be conclusive and binding upon the Participant and the Company for all purposes. For purposes of making the calculations required by this Article VII, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Participant shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Article VII. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Article VII. ARTICLE VIII EMPLOYMENT STATUS; WITHHOLDING 1. EMPLOYMENT STATUS. This Plan does not constitute a contract of employment or impose on the Participant or the Company any obligation to retain the Participant as an Employee, to change the status of the Participant's employment, or to change the Company's policies regarding termination of employment. The Participant's employment is and shall continue to be at-will, as defined under applicable law. If the Participant's employment with the Company or a successor entity terminates for any reason, including (without limitation) any termination prior to a Change of Control, the Participant shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Plan, or as may otherwise be available in accordance with the Company's established employee plans and practices or other agreements with the Company at the time of termination. 2. TAXATION OF PLAN PAYMENTS. All amounts paid pursuant to this Plan shall be subject to regular payroll and withholding taxes. ARTICLE IX SUCCESSORS TO COMPANY AND PARTICIPANTS 1. COMPANY'S SUCCESSORS. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Plan and agree expressly to perform the obligations under this Plan by executing a written agreement. For all purposes under this Plan, the term "Company" shall include any successor to the Company's business and/or assets which executes and delivers the assumption agreement described in this subsection or which becomes bound by the terms of this Plan by operation of law. 2. PARTICIPANT'S SUCCESSORS. All rights of the Participant hereunder shall inure to the benefit of, and be enforceable by, the Participant's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. -9- ARTICLE X DURATION, AMENDMENT AND TERMINATION 1. DURATION. This Plan shall terminate on August 20, 1998 unless (i) extended by the Board, or (ii) a Change of Control occurs prior to August 20, 1998. If a Change of Control occurs prior to August 20, 1998, then this Plan shall terminate upon the earlier of (i) the date that all obligations of the Company or successor entities hereunder have been satisfied, or (ii) twenty-four (24) months after a Change of Control, unless sooner terminated as provided in this Article X. A termination of this Plan pursuant to the preceding sentences shall be effective for all purposes, except that such termination shall not affect the payment or provision of compensation or benefits earned by a Participant prior to the termination of this Plan. 2. AMENDMENT AND TERMINATION. The Board of the Company shall have the discretionary authority to amend the Plan in any respect, including as to the removal or addition of Participants, by resolution adopted by a majority of the Board of the Company, unless a Change of Control has previously occurred. The Plan may be terminated by resolution adopted by a majority of the Board, unless a Change of Control has previously occurred. If a Change of Control occurs, the Plan and the designation of Participants thereto shall no longer be subject to amendment, change, substitution, deletion, revocation or termination in any respect whatsoever. ARTICLE XI PLAN ADMINISTRATION 1. APPEAL. A Participant or former Participant who disagrees with their allotment of benefits under this Plan may file a written appeal with the designated Human Resources representative. Any claim relating to this Plan shall be subject to this appeal process. The written appeal must be filed within sixty (60) days of the Participant's termination date. The appeal must state the reasons the Participant or former Participant believes he or she is entitled to different benefits under the Plan. The designated Human Resources representative shall review the claim. If the claim is wholly or partially denied, the designated Human Resources representative shall provide the Participant or former Participant a written notice of the denial, specifying the reasons the claim was denied. Such notice shall be provided within ninety (90) days of receiving the written appeal. If the claim is denied, in whole or in part, the Participant may request a review of the denial at any time within ninety (90) days following the date the Participant received written notice of the denial of his or her claim. For purposes of this subsection, any action required or authorized to be taken by the Participant may be taken by a representative authorized in writing by the Participant to represent him or her. The designated Human Resources representative shall afford the Participant a full and fair review of the decision denying the claim and, if so requested, shall: -10- (a) Permit the Participant to review any documents that are pertinent to the claim; (b) Permit the Participant to submit to the designated Human Resources representative issues and comments in writing; and (c) The decision on review by the designated Human Resources representative shall be in writing and shall be issued within 60 days following receipt of the request for review. The decision on review shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision of the designated Human Resources representative is based. 2. ARBITRATION. If the appeal of a Participant or former Participant is denied, or if the outcome of said appeal is unsatisfactory to the Participant or former Participant, the sole remedy hereunder shall be arbitration as set forth below. Any dispute or controversy arising under or in connection with the Plan shall be settled by arbitration in accordance with the rules of the American Arbitration Association then in effect, conducted before a panel of three arbitrators sitting in a location selected by the Participant within fifty (50) miles from the location of his or her job with the Company. In consideration for the Participant's or former Participant's waiver of their right to litigate any such dispute or controversy in a court of law, and notwithstanding any contrary provisions of California law regarding allocation of attorney fees, costs and expenses in arbitration proceedings, the Company agrees to pay, on a monthly basis, the reasonable attorney fees, costs and expenses (with such reasonableness determined by the arbitrator) incurred in good faith by the Participant or former Participant in connection with any such arbitration regardless of the outcome of the arbitration. Judgment may be entered on the arbitrator's award in any court having jurisdiction. If the Participant or former Participant is the prevailing party or recovers any damages in such arbitration, he or she shall be entitled to receive, in addition thereto, pre- judgment and post-judgment interest. Punitive damages shall not be awarded. ARTICLE XII NOTICE 1. GENERAL. Notices and all other communications contemplated by this Plan shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Participant, mailed notices shall be addressed to him or her at the home address which he or she most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its General Counsel. 2. NOTICE OF TERMINATION BY THE COMPANY. Any termination by the Company of the Participant's employment with the Company at any time within twenty-four (24) months following a Change of Control shall be communicated by a notice of termination to the Participant at least five (5) -11- days prior to the date of such termination (or at least thirty (30) days prior to the date of a termination by reason of the Participant's Disability). Such notice shall indicate the specific termination provision or provisions in this Plan relied upon (if any), shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision or provisions so indicated, and shall specify the termination date. 3. NOTICE BY THE PARTICIPANT OF INVOLUNTARY TERMINATION BY THE COMPANY. In the event that the Participant determines that an Involuntary Termination has occurred at any time within twenty-four (24) months following a Change of Control, the Participant shall give written notice that such Involuntary Termination has occurred. Such notice shall be delivered by the Participant to the Company within ninety (90) days following the date on which such Involuntary Termination occurred, shall indicate the specific provision or provisions in this Plan upon which the Participant relied to make such determination and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for such determination. The failure by the Participant to include in the notice any fact or circumstance which contributes to a showing of Involuntary Termination shall not waive any right of the Participant hereunder or preclude the Participant from asserting such fact or circumstance in enforcing his or her rights hereunder. ARTICLE XIII MISCELLANEOUS PROVISIONS 1. NO DUTY TO MITIGATE. The Participant shall not be required to mitigate the amount of any payment contemplated by this Plan, nor shall any such payment be reduced by any earnings that the Participant may receive from any other source. 2. SEVERABILITY. The invalidity or unenforceability of any provision or provisions of this Plan shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. 3. NO ASSIGNMENT OF BENEFITS. The rights of any person to payments or benefits under this Plan shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this subsection shall be void. 4. TAX WITHHOLDING. All payments made pursuant to this Plan will be subject to withholding of applicable income and employment taxes. 5. ASSIGNMENT BY COMPANY. The Company may assign its rights under this Plan to an affiliate, and an affiliate may assign its rights under this Plan to another affiliate of the Company or to the Company; provided, however, that no assignment shall be made if the net worth of the assignee is less than the net worth of the Company at the time of assignment; provided, further, that the -12- Company shall guarantee all benefits payable hereunder. In the case of any such assignment, the term "Company" when used in this Plan shall mean the corporation that actually employs the Participant. ARTICLE XIV ERISA REQUIRED INFORMATION 1. PLAN SPONSOR. The Plan sponsor and administrator is: Circon Corporation 6500 Hollister Avenue Santa Barbara, California 93117 (805) 685-5100 2. DESIGNATED AGENT. Designated agent for service of process: General Counsel Circon Corporation 6500 Hollister Avenue Santa Barbara, California 93117 3. PLAN RECORDS. Plan records are kept on a fiscal year basis. 4. PLAN FUNDING. The Plan is funded from the Company's general assets. -13- CIRCON CORPORATION MANAGEMENT RETENTION PLAN NOTICE OF PARTICIPATION [LEVEL I] TO: Richard A. Auhll DATE: The Board of Directors of the Company has designated you as a Participant in the Circon Corporation Management Retention Plan (the "Plan"), a copy of which is attached hereto. The terms and conditions of your participation in the Plan are as set forth in the Plan and herein. The variables relating to your Plan participation are as follows: 100% TARGET BONUS AMOUNT INCLUDED IN DEFINITION OF ANNUAL COMPENSATION - Yes SEVERANCE WINDOW PERIOD - Twenty-four months SEVERANCE PAYMENT PERCENTAGE - 167% HEALTH CARE CONTINUATION PERIOD - Two and one-half years RETENTION PAYMENT PERCENTAGE - 83% PRO-RATED BONUS AMOUNT ELIGIBILITY - Yes GOLDEN PARACHUTE EXCISE TAX TREATMENT - Instead of the limitation set forth in Article VII of the Plan, the following provisions shall apply: In the event that the benefits provided for in the Plan, when aggregated with any other payments or benefits received by you, would (i) constitute "parachute payments" within the meaning of Section 280G of the Code, and (ii) would be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then your Plan benefits shall be either (a) delivered in full, or (b) delivered as to such lesser extent which would result in no portion of such benefits being subject to the Excise Tax, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by you on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under Section 4999 of the Code. Unless the Company and you otherwise agree in writing, any determination required under this paragraph shall be made in writing by the same firm of independent public accountants who were employed by the Company immediately prior to the Change of Control (the "Accountants") whose determination shall be conclusive and binding upon you and the Company for all purposes. For purposes of making the calculations required by this paragraph, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and you shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this paragraph. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this paragraph. If you agree to participate in the Plan on these terms and conditions, please acknowledge your acceptance by signing below. Please return the signed copy of this Notice of Participation within ten (10) days of the date set forth above to: Bruce Thompson Circon Corporation 6500 Hollister Avenue Santa Barbara, California 93117 Your failure to timely remit this signed Notice of Participation will result in your removal from the Plan. Please retain a copy of this Notice of Participation, along with the Plan, for your records. Date: Signature: ---------------- ----------------------------- CIRCON CORPORATION MANAGEMENT RETENTION PLAN NOTICE OF PARTICIPATION [LEVEL II] TO: [NAME OF PARTICIPANT] DATE: The Board of Directors of the Company has designated you as a Participant in the Circon Corporation Management Retention Plan (the "Plan"), a copy of which is attached hereto. The terms and conditions of your participation in the Plan are as set forth in the Plan and herein. The variables relating to your Plan participation are as follows: 100% TARGET BONUS AMOUNT INCLUDED IN DEFINITION OF ANNUAL COMPENSATION - Yes SEVERANCE WINDOW PERIOD - Twenty-four months SEVERANCE PAYMENT PERCENTAGE - 133% HEALTH CARE CONTINUATION PERIOD - Two Years RETENTION PAYMENT PERCENTAGE - 67% PRO-RATED BONUS AMOUNT ELIGIBILITY - Yes If you agree to participate in the Plan on these terms and conditions, please acknowledge your acceptance by signing below. Please return the signed copy of this Notice of Participation within ten (10) days of the date set forth above to: Bruce Thompson Circon Corporation 6500 Hollister Avenue Santa Barbara, California 93117 Your failure to timely remit this signed Notice of Participation will result in your removal from the Plan. Please retain a copy of this Notice of Participation, along with the Plan, for your records. Should you have any questions regarding this Notice of Participation or the Plan, please do not hesitate to contact Bruce Thompson at 805-961-1650. Date: Signature: ---------------- ------------------------------ CIRCON CORPORATION MANAGEMENT RETENTION PLAN NOTICE OF PARTICIPATION [LEVEL III] TO: [NAME OF PARTICIPANT] DATE: The Board of Directors of the Company has designated you as a Participant in the Circon Corporation Management Retention Plan (the "Plan"), a copy of which is attached hereto. The terms and conditions of your participation in the Plan are as set forth in the Plan and herein. The variables relating to your Plan participation are as follows: 100% TARGET BONUS AMOUNT INCLUDED IN DEFINITION OF ANNUAL COMPENSATION - Yes SEVERANCE WINDOW PERIOD - Twenty-four months SEVERANCE PAYMENT PERCENTAGE - 125% HEALTH CARE CONTINUATION PERIOD - One and one-half years RETENTION PAYMENT PERCENTAGE - 25% PRO-RATED BONUS AMOUNT ELIGIBILITY - Yes If you agree to participate in the Plan on these terms and conditions, please acknowledge your acceptance by signing below. Please return the signed copy of this Notice of Participation within ten (10) days of the date set forth above to: Bruce Thompson Circon Corporation 6500 Hollister Avenue Santa Barbara, California 93117 Your failure to timely remit this signed Notice of Participation will result in your removal from the Plan. Please retain a copy of this Notice of Participation, along with the Plan, for your records. Should you have any questions regarding this Notice of Participation or the Plan, please do not hesitate to contact Bruce Thompson at 805-961-1650. Date: Signature: ---------------- ------------------------------ CIRCON CORPORATION MANAGEMENT RETENTION PLAN NOTICE OF PARTICIPATION [LEVEL IV] TO: [NAME OF PARTICIPANT] DATE: The Board of Directors of the Company has designated you as a Participant in the Circon Corporation Management Retention Plan (the "Plan"), a copy of which is attached hereto. The terms and conditions of your participation in the Plan are as set forth in the Plan. The initially capitalized terms used in this Notice are formally defined in the Plan, so you should look in the Plan for their precise meaning. The variables relating to your Plan participation are as follows: 100% TARGET BONUS AMOUNT INCLUDED IN DEFINITION OF ANNUAL COMPENSATION - No SEVERANCE WINDOW PERIOD - Twelve months SEVERANCE PAYMENT PERCENTAGE - 62.5% HEALTH CARE CONTINUATION PERIOD - Nine months RETENTION PAYMENT PERCENTAGE - 12.5% PRO-RATED BONUS AMOUNT ELIGIBILITY - No SUMMARY OF BENEFITS There are two components to your Plan benefits: (i) retention/severance payments, and (ii) post-employment coverage under the Company's group health and life insurance plans. RETENTION/SEVERANCE PAYMENTS The total potential retention/severance payment is based on 75% of your annual base salary. The retention payment component is equal to one-sixth of the total cash payment. It will be earned ninety days following a change of control of the Company if you have remained employed by the Company or the acquiring entity. The retention payment is also triggered if you are involuntarily terminated without cause or are constructively terminated (all as defined in the Plan) following a change of control but prior to ninety days following a change of control. The severance payment component is equal to five-sixths of the total cash payment (for vice-presidents and senior managers). It will be paid only if you are involuntarily terminated without cause or are constructively terminated (again, as defined in the Plan) within twelve months following a change of control. POST-EMPLOYMENT BENEFITS In the event of an involuntary termination without cause or constructive termination (as defined in the Plan) within twelve months following a change of control, you (and, if covered prior to the change of control, your dependents) will receive continued group health, dental and life insurance coverage. The Company is required to pay the same percentage of the related insurance premiums as were paid prior to the change of control. The Company continues to make these premium payments for a period of nine months, or, if earlier, until you become covered under comparable benefit plans of another employer. This Notice is just intended to summarize the Plan provisions and to set forth the variables relating to your participation, not to change the provisions of the Plan. The specific terms and conditions of your participation in the Plan are set forth in the attached Plan. If you agree to participate in the Plan on these terms and conditions, please acknowledge your acceptance by signing below. Please return the signed copy of this Notice of Participation within ten (10) days of the date set forth above to: Bruce Thompson Circon Corporation 6500 Hollister Avenue Santa Barbara, California 93117 Your failure to timely remit this signed Notice of Participation will result in your removal from the Plan. Please retain a copy of this Notice of Participation, along with the Plan, for your records. Should you have any questions regarding this Notice of Participation or the Plan, please do not hesitate to contact Bruce Thompson at 805-961-1650. Date: Signature: ---------------- ----------------------------- -2- EX-2 3 EXH 2 - SALES FORCE RETENTION PLAN Exhibit 2 CIRCON CORPORATION SALES FORCE RETENTION PLAN Introduction It is expected that Circon Corporation (the "Company") from time to time will consider the possibility of an acquisition by another company or other change of control. The Board of Directors of the Company (the "Board") recognizes that such consideration can be a distraction to key sales employees and can cause such employees to consider alternative employment opportunities. The Board has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication and objectivity of these employees, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes that it is in the best interests of the Company and its stockholders to provide these employees with an incentive to continue their employment and to motivate these employees to maximize the value of the Company upon a Change of Control for the benefit of its stockholders. The Board believes that it is imperative to provide these employees with (i) certain retention benefits payable upon remaining in the employ of the Company for a specified period following a Change of Control, and (ii) certain severance benefits upon termination of employment following a Change of Control. These benefits provide these employees with enhanced financial security and provide efficient incentive and encouragement to these employees to remain with the Company notwithstanding the possibility or occurrence of a Change of Control. Accordingly, the following plan has been developed and adopted. ARTICLE I ESTABLISHMENT OF PLAN 1. ESTABLISHMENT OF PLAN. As of the Effective Date, the Company hereby establishes a sales force retention plan to be known as the "Sales Force Retention Plan" (the "Plan"), as set forth in this document. The purposes of the Plan are as set forth in the Introduction. 2. APPLICABILITY OF PLAN. Subject to the terms of this Plan, the benefits provided by this Plan shall be available to Participants. 3. CONTRACTUAL RIGHT TO BENEFITS. Subject to the terms of this Plan, this Plan establishes and vests in each Participant a contractual right to the benefits to which he or she is entitled pursuant to the terms thereof, enforceable by the Participant against the Company. ARTICLE II DEFINITIONS AND CONSTRUCTION 1. DEFINITIONS. Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the term is capitalized. (a) CAUSE. "Cause" shall mean (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. (b) CHANGE OF CONTROL. "Change of Control" shall mean the occurrence of any of the following events: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities 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. -2- (c) COMPANY. "Company" shall mean Circon Corporation, any subsidiary corporations, any successor entities as provided in Article VII hereof, and any parent or subsidiaries of such successor entities. (d) DISABILITY. "Disability" shall mean that the Participant has been unable to perform his duties as an Employee as the result of incapacity due to physical or mental illness, and such inability, at least 26 weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Participant or the Participant's legal representative (such agreement as to acceptability not to be unreasonably withheld). Termination resulting from Disability may only be effected after at least 30 days' written notice by the Company of its intention to terminate the Participant's employment. In the event that the Participant resumes the performance of substantially all of his duties hereunder before the termination of his employment becomes effective, the notice of intent to terminate shall automatically be deemed to have been revoked. (e) EFFECTIVE DATE. "Effective Date" shall mean the date the Plan is approved by the Board. (f) EMPLOYEE. "Employee" shall mean an individual employed by the Company. (g) ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. (h) MONTHLY COMPENSATION. "Monthly Compensation" shall mean the amount of travel allowance, pro-rated bonus (including 100% of amounts required to be held in a suspense account until year-end) and compensation earned by a Participant in a specified calendar month. (i) PARTICIPANT. "Participant" shall mean an individual who meets the eligibility requirements of Article III. (j) PLAN. "Plan" shall mean this Circon Corporation Sales Force Retention Plan. (k) RETENTION PAYMENT. "Retention Payment" shall mean the payment of retention compensation as provided in Article V hereof. (l) SEVERANCE PAYMENT. "Severance Payment" shall mean the payment of severance compensation as provided in Article IV hereof. -3- ARTICLE III ELIGIBILITY Each Employee who is designated by the Board and who is a sales territory manager or a sales video specialist of the Company who is not on Company probation at the time of a Change of Control shall be a Participant in the Plan. A Participant shall cease to be a Participant in the Plan when he or she ceases to be an Employee, unless such Participant is entitled to benefits hereunder. A Participant entitled to benefits hereunder shall remain a Participant in the Plan until the full amount of the benefits have been delivered to the Participant. ARTICLE IV SEVERANCE BENEFITS 1. RIGHT TO SEVERANCE BENEFITS. (a) TERMINATION FOLLOWING A CHANGE OF CONTROL. If a Participant's employment terminates at any time within twelve (12) months after a Change of Control, then the Participant shall be entitled to receive severance benefits as follows: (i) SEVERANCE PAY UPON TERMINATION BY COMPANY OTHER THAN FOR CAUSE WITHIN NINETY DAYS FOLLOWING A CHANGE OF CONTROL. If the Participant's employment is terminated by the Company other than for Cause within ninety (90) days following a Change of Control, then the Participant shall be entitled to receive a Severance Payment equal to the sum of (i) his or her Monthly Compensation for the last two full calendar months immediately preceding the Change of Control, and (ii) his or her Retention Payment. EXAMPLE: A Change of Control is consummated on June 15, 1997. Participant is terminated by the Company other than for Cause as of July 1, 1997. Participant's Monthly Compensation for April 1997 is $7,000. Participant's Monthly Compensation for May 1997 is $8,000. The Participant is entitled to a Severance Payment of $30,000. (ii) SEVERANCE PAY UPON TERMINATION BY COMPANY OTHER THAN FOR CAUSE ON OR AFTER NINETY DAYS FOLLOWING A CHANGE OF CONTROL. If the Participant's employment is terminated by the Company other than for Cause on or after ninety (90) days following a Change of Control, then the Participant shall be entitled to receive a Severance Payment equal to his or her Monthly Compensation for the last two full calendar months immediately preceding the Change of Control. EXAMPLE: A Change of Control is consummated on June 15, 1997. Participant is terminated by the Company other than for Cause as of October 1, 1997. Participant's -4- Monthly Compensation for April 1997 is $7,000. Participant's Monthly Compensation for May 1997 is $8,000. The Participant is entitled to a Severance Payment of $15,000. (iii) VOLUNTARY RESIGNATION; TERMINATION FOR CAUSE. If the Participant's employment terminates by reason of the Participant's voluntary resignation, or if the Participant is terminated by the Company for Cause, then the Participant shall not be entitled to receive severance benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and policies at the time of such termination other than under this Plan. (iv) DISABILITY; DEATH. If the Company terminates the Participant's employment as a result of the Participant's Disability, or such Participant's employment is terminated due to the death of the Participant, then the Participant shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and policies at the time of such Disability or death; provided, however, that Participant shall still be eligible to receive a Retention Payment pursuant to the terms of Article V. (b) TERMINATION APART FROM CHANGE OF CONTROL. In the event that a Participant's employment is terminated for any reason, either prior to the occurrence of a Change of Control or after the twelve (12)-month period following a Change of Control, then the Participant shall be entitled to receive severance benefits only as may then be established under the Company's existing severance and benefit plans and policies at the time of such termination other than this Plan. 2. TIMING OF SEVERANCE PAYMENTS. Any Severance Payment to which a Participant is entitled shall be paid by the Company in a lump sum within ten (10) business days after the Participant's termination date. ARTICLE V RETENTION PAYMENTS 1. RIGHT TO RETENTION PAYMENTS. If (i) a Participant remains employed by the Company for ninety (90) days after a Change of Control, or (ii) a Participant's employment with the Company is terminated due to the death or Disability of the Participant following a Change of Control but prior to ninety days after a Change of Control, then the Participant shall be entitled to receive a Retention Payment equal to his or her Monthly Compensation for the last two full calendar months immediately preceding the Change of Control. EXAMPLE: A Change of Control is consummated on June 15, 1997. Participant remains employed with the Company for ninety (90) days following the Change of Control. Participant's Monthly Compensation for April 1997 is $7,000. Participant's Monthly Compensation for May 1997 is $8,000. The Participant is entitled to a Retention Payment equal to $15,000. -5- 2. TIMING OF RETENTION PAYMENTS. Any Retention Payment to which a Participant is entitled shall be paid by the Company in a lump sum within ten (10) business days after the ninetieth (90th) day after a Change of Control. ARTICLE VI EMPLOYMENT STATUS; WITHHOLDING 1. EMPLOYMENT STATUS. This Plan does not constitute a contract of employment or impose on the Participant or the Company any obligation to retain the Participant as an Employee, to change the status of the Participant's employment, or to change the Company's policies regarding termination of employment. The Participant's employment is and shall continue to be at-will, as defined under applicable law. If the Participant's employment with the Company or a successor entity terminates for any reason, including (without limitation) any termination prior to a Change of Control, the Participant shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Plan, or as may otherwise be available in accordance with the Company's established employee plans and practices or other agreements with the Company at the time of termination. 2. TAXATION OF PLAN PAYMENTS. All amounts paid pursuant to this Plan shall be subject to regular payroll and withholding taxes. ARTICLE VII SUCCESSORS TO COMPANY AND PARTICIPANTS 1. COMPANY'S SUCCESSORS. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Plan and agree expressly to perform the obligations under this Plan by executing a written agreement. For all purposes under this Plan, the term "Company" shall include any successor to the Company's business and/or assets which executes and delivers the assumption agreement described in this subsection or which becomes bound by the terms of this Plan by operation of law. 2. PARTICIPANT'S SUCCESSORS. All rights of the Participant hereunder shall inure to the benefit of, and be enforceable by, the Participant's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. -6- ARTICLE VIII DURATION, AMENDMENT AND TERMINATION 1. DURATION. This Plan shall terminate on August 20, 1998 unless (i) extended by the Board, or (ii) a Change of Control occurs prior to August 20, 1998. If a Change of Control occurs prior to August 20, 1998, then this Plan shall terminate upon the earlier of (i) the date that all obligations of the Company or successor entities hereunder have been satisfied, or (ii) twelve (12) months after a Change of Control, unless sooner terminated as provided in this Article VIII. A termination of this Plan pursuant to the preceding sentences shall be effective for all purposes, except that such termination shall not affect the payment or provision of compensation or benefits earned by a Participant prior to the termination of this Plan. 2. AMENDMENT AND TERMINATION. The Board of the Company shall have the discretionary authority to amend the Plan in any respect, including as to the removal or addition of Participants, by resolution adopted by a majority of the Board of the Company, unless a Change of Control has previously occurred. The Plan may be terminated by resolution adopted by a majority of the Board, unless a Change of Control has previously occurred. If a Change of Control occurs, the Plan and the designation of Participants thereto shall no longer be subject to amendment, change, substitution, deletion, revocation or termination in any respect whatsoever. ARTICLE IX PLAN ADMINISTRATION 1. APPEAL. A Participant or former Participant who disagrees with their allotment of benefits under this Plan may file a written appeal with the designated Human Resources representative. Any claim relating to this Plan shall be subject to this appeal process. The written appeal must be filed within sixty (60) days of the Participant's termination date. The appeal must state the reasons the Participant or former Participant believes he or she is entitled to different benefits under the Plan. The designated Human Resources representative shall review the claim. If the claim is wholly or partially denied, the designated Human Resources representative shall provide the Participant or former Participant a written notice of the denial, specifying the reasons the claim was denied. Such notice shall be provided within ninety (90) days of receiving the written appeal. If the claim is denied, in whole or in part, the Participant may request a review of the denial at any time within ninety (90) days following the date the Participant received written notice of the denial of his or her claim. For purposes of this subsection, any action required or authorized to be taken by the Participant may be taken by a representative authorized in writing by the Participant to represent him or her. The designated Human Resources representative shall afford the Participant a full and fair review of the decision denying the claim and, if so requested, shall: -7- (a) Permit the Participant to review any documents that are pertinent to the claim; (b) Permit the Participant to submit to the designated Human Resources representative issues and comments in writing; and (c) The decision on review by the designated Human Resources representative shall be in writing and shall be issued within 60 days following receipt of the request for review. The decision on review shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision of the designated Human Resources representative is based. 2. ARBITRATION. If the appeal of a Participant or former Participant is denied, or if the outcome of said appeal is unsatisfactory to the Participant or former Participant, the sole remedy hereunder shall be arbitration as set forth below. Any dispute or controversy arising under or in connection with the Plan shall be settled by arbitration in accordance with the rules of the American Arbitration Association then in effect, conducted before a panel of three arbitrators sitting in a location selected by the Participant within fifty (50) miles from the location of his or her job with the Company. In consideration for the Participant's or former Participant's waiver of their right to litigate any such dispute or controversy in a court of law, and notwithstanding any contrary provisions of California law regarding allocation of attorney fees, costs and expenses in arbitration proceedings, the Company agrees to pay, on a monthly basis, the reasonable attorney fees, costs and expenses (with such reasonableness determined by the arbitrator) incurred in good faith by the Participant or former Participant in connection with any such arbitration regardless of the outcome of the arbitration. Judgment may be entered on the arbitrator's award in any court having jurisdiction. If the Participant or former Participant is the prevailing party or recovers any damages in such arbitration, he or she shall be entitled to receive, in addition thereto, pre- judgment and post-judgment interest. Punitive damages shall not be awarded. ARTICLE X NOTICE 1. GENERAL. Notices and all other communications contemplated by this Plan shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Participant, mailed notices shall be addressed to him or her at the home address which he or she most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its General Counsel. 2. NOTICE OF TERMINATION BY THE COMPANY. Any termination by the Company of the Participant's employment with the Company at any time within twelve (12) months following a -8- Change of Control shall be communicated by a notice of termination to the Participant at least five (5) days prior to the date of such termination (or at least thirty (30) days prior to the date of a termination by reason of the Participant's Disability). Such notice shall indicate the specific termination provision or provisions in this Plan relied upon (if any), shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision or provisions so indicated, and shall specify the termination date. ARTICLE XI MISCELLANEOUS PROVISIONS 1. NO DUTY TO MITIGATE. The Participant shall not be required to mitigate the amount of any payment contemplated by this Plan, nor shall any such payment be reduced by any earnings that the Participant may receive from any other source. 2. SEVERABILITY. The invalidity or unenforceability of any provision or provisions of this Plan shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. 3. NO ASSIGNMENT OF BENEFITS. The rights of any person to payments or benefits under this Plan shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this subsection shall be void. 4. TAX WITHHOLDING. All payments made pursuant to this Plan will be subject to withholding of applicable income and employment taxes. 5. ASSIGNMENT BY COMPANY. The Company may assign its rights under this Plan to an affiliate, and an affiliate may assign its rights under this Plan to another affiliate of the Company or to the Company; provided, however, that no assignment shall be made if the net worth of the assignee is less than the net worth of the Company at the time of assignment; provided, further, that the Company shall guarantee all benefits payable hereunder. In the case of any such assignment, the term "Company" when used in this Plan shall mean the corporation that actually employs the Participant. -9- ARTICLE XII ERISA REQUIRED INFORMATION 1. PLAN SPONSOR. The Plan sponsor and administrator is: Circon Corporation 6500 Hollister Avenue Santa Barbara, California 93117 (805) 685-5100 2. DESIGNATED AGENT. Designated agent for service of process: General Counsel Circon Corporation 6500 Hollister Avenue Santa Barbara, California 93117 3. PLAN RECORDS. Plan records are kept on a fiscal year basis. 4. PLAN FUNDING. The Plan is funded from the Company's general assets. -10- CIRCON CORPORATION SALES FORCE RETENTION PLAN NOTICE OF PARTICIPATION TO: [NAME OF PARTICIPANT] DATE: August 27, 1996 You are eligible to participate in the Circon Corporation Sales Force Retention Plan (the "Plan"), a copy of which is attached. Please note that the initially capitalized terms used in this Notice are formally defined in the Plan, so you should look in the Plan for their precise meaning. The Plan provides retention and severance benefits for all sales territory managers and sales video specialists who are not on probation at the time of a Change of Control. It provides for a maximum payment of twice the compensation earned in the last two full calendar months preceding the Change of Control. Compensation is defined for this purpose as travel allowance, pro-rated bonus (including 100% of amounts required to be held in a suspense account until year- end) and commissions. The retention payment component is equal to the compensation that you earned in the last two full calendar months preceding the change of control. You will earn this payment ninety days following a change of control if you are eligible and remain employed by the Company. This retention payment is also triggered if a you are eligible and are involuntarily terminated without cause following a change of control but prior to ninety days following such change of control. The severance payment component is also equal to the compensation earned in the last two full calendar months preceding the change of control. It will be paid only if you are eligible and are involuntarily terminated without cause within twelve months following a change of control. This Notice is just intended to summarize the Plan provisions, not to change the provisions of the Plan or your participation in the Plan. The specific terms and conditions of your participation in the Plan are set forth in the attached Plan. Please retain a copy of this Notice of Participation, along with the Plan, for your records. Should you have any questions regarding this Notice of Participation or the Plan, please do not hesitate to contact Bruce Thompson at 805-961-1650. EX-3 4 EXH 3 - MANAGERS, PROFESSIONALS/KEY CONTRIBUTORS Exhibit 3 CIRCON CORPORATION MANAGERS, PROFESSIONALS & KEY CONTRIBUTORS RETENTION PLAN Introduction It is expected that Circon Corporation (the "Company") from time to time will consider the possibility of an acquisition by another company or other change of control. The Board of Directors of the Company (the "Board") recognizes that such consideration can be a distraction to key employees and can cause such employees to consider alternative employment opportunities. The Board has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication and objectivity of these employees, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes that it is in the best interests of the Company and its stockholders to provide these employees with an incentive to continue their employment and to motivate these employees to maximize the value of the Company upon a Change of Control for the benefit of its stockholders. The Board believes that it is imperative to provide these employees with (i) certain retention benefits payable upon remaining in the employ of the Company for a specified period following a Change of Control, and (ii) certain severance benefits upon termination of employment following a Change of Control. These benefits provide these employees with enhanced financial security and provide efficient incentive and encouragement to these employees to remain with the Company notwithstanding the possibility or occurrence of a Change of Control. Accordingly, the following plan has been developed and adopted. ARTICLE I ESTABLISHMENT OF PLAN 1. ESTABLISHMENT OF PLAN. As of the Effective Date, the Company hereby establishes a retention plan to be known as the Managers, Professionals & Key Contributors Retention Plan (the "Plan"), as set forth in this document. The purposes of the Plan are as set forth in the Introduction. 2. APPLICABILITY OF PLAN. Subject to the terms of this Plan, the benefits provided by this Plan shall be available to those Employees of the Company who, on or after the Effective Date, receive a Notice of Participation. 3. CONTRACTUAL RIGHT TO BENEFITS. Subject to the terms of this Plan, this Plan establishes and vests in each Participant a contractual right to the benefits to which he or she is entitled pursuant to the terms thereof, enforceable by the Participant against the Company. ARTICLE II DEFINITIONS AND CONSTRUCTION 1. DEFINITIONS. Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the term is capitalized. (a) BASE SALARY. "Base Salary" shall mean the Participant's base salary from the Company as in effect immediately prior to a Change of Control. (b) CAUSE. "Cause" shall mean (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. (c) CHANGE OF CONTROL. "Change of Control" shall mean the occurrence of any of the following events: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities 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 [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 -2- (iv) the consummation of the sale or disposition by the Company of all or substantially all the Company's assets. (d) COMPANY. "Company" shall mean Circon Corporation, any subsidiary corporations, any successor entities as provided in Article VII hereof, and any parent or subsidiaries of such successor entities. (e) DISABILITY. "Disability" shall mean that the Participant has been unable to perform his duties as an Employee as the result of incapacity due to physical or mental illness, and such inability, at least 26 weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Participant or the Participant's legal representative (such agreement as to acceptability not to be unreasonably withheld). Termination resulting from Disability may only be effected after at least 30 days' written notice by the Company of its intention to terminate the Participant's employment. In the event that the Participant resumes the performance of substantially all of his duties hereunder before the termination of his employment becomes effective, the notice of intent to terminate shall automatically be deemed to have been revoked. (f) EFFECTIVE DATE. "Effective Date" shall mean the date the Plan is approved by the Board. (g) EMPLOYEE. "Employee" shall mean an individual employed by the Company. (h) ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. (i) NOTICE OF PARTICIPATION. "Notice of Participation" shall mean an individualized written notice of participation in the Plan from an authorized Employee of the Company. (j) PARTICIPANT. "Participant" shall mean an individual who meets the eligibility requirements of Article III. (k) PLAN. "Plan" shall mean this Circon Corporation Management Retention Plan. (l) RETENTION PAYMENT. "Retention Payment" shall mean the payment of retention compensation as provided in Article V hereof. (m) SEVERANCE PAYMENT. "Severance Payment" shall mean the payment of severance compensation as provided in Article IV hereof. -3- ARTICLE III ELIGIBILITY Each Employee who is designated by the Board and who receives a Notice of Participation shall be a Participant in the Plan. A Participant shall cease to be a Participant in the Plan when he or she ceases to be an Employee, unless such Participant is entitled to benefits hereunder. A Participant entitled to benefits hereunder shall remain a Participant in the Plan until the full amount of the benefits have been delivered to the Participant. ARTICLE IV SEVERANCE BENEFITS 1. RIGHT TO SEVERANCE BENEFITS. (a) TERMINATION FOLLOWING A CHANGE OF CONTROL. If a Participant's employment terminates at any time within twelve (12) months after a Change of Control, then the Participant shall be entitled to receive severance benefits as follows: (i) SEVERANCE PAY UPON TERMINATION BY COMPANY OTHER THAN FOR CAUSE WITHIN NINETY DAYS FOLLOWING A CHANGE OF CONTROL. If the Participant's employment is terminated by the Company other than for Cause within ninety (90) days following a Change of Control, then the Participant shall be entitled to receive a Severance Payment equal to the sum of (i) two weeks' of his or her Base Salary multiplied by 66.67% for each full year of service with the Company or an entity acquired by the Company as of the date of the Change of Control, and (ii) his or her Retention Payment, subject to a minimum Severance Payment equal to three months' Base Salary and a maximum Severance Payment equal to one year's Base Salary. EXAMPLE: A Change of Control is consummated on June 15, 1997. Participant is terminated by the Company other than for Cause as of July 1, 1997. Participant had worked three and three-quarters years with Circon as of the date of the Change of Control. Participant's Base Salary is $1,000 per week ($52,000 per year). The Participant's Severance Payment would be ($2,000 x 66.67% x 3) + ($2,000 x 33.33% x 3) = $6,000. However, this amount is less than three months' Base Salary, which equals $13,000. Therefore the Participant is entitled to a Severance Payment of $13,000. (ii) SEVERANCE PAY UPON TERMINATION BY COMPANY OTHER THAN FOR CAUSE ON OR AFTER NINETY DAYS FOLLOWING A CHANGE OF CONTROL. If the Participant's employment is terminated by the Company other than for Cause on or after ninety (90) days following a Change of Control, then the Participant shall be entitled to receive a Severance Payment equal to two weeks of his or her Base Salary multiplied by 66.67% for each full year of service with the Company or an entity acquired by the Company as of the date of the Change of Control (with a minimum Severance -4- Payment equal to two months' Base Salary and a maximum Severance Payment equal to eight months' Base Salary). EXAMPLE: A Change of Control is consummated on June 15, 1997. Participant is terminated by the Company other than for Cause as of October 1, 1997. Participant had worked three and three-quarters years with Circon prior to the date of the Change of Control. Participant's Base Salary is $1,000 per week ($52,000 per year). The Participant's Severance Payment would be ($2,000 x 66.67% x 3) = $4,000.20. However, this amount is less than two months' Base Salary, which equals $8,666.67 Therefore the Participant is entitled to a Severance Payment of $8,666.67. (iii) VOLUNTARY RESIGNATION; TERMINATION FOR CAUSE. If the Participant's employment terminates by reason of the Participant's voluntary resignation, or if the Participant is terminated by the Company for Cause, then the Participant shall not be entitled to receive severance benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and policies at the time of such termination other than under this Plan. (iv) DISABILITY; DEATH. If the Company terminates the Participant's employment as a result of the Participant's Disability, or such Participant's employment is terminated due to the death of the Participant, then the Participant shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and policies at the time of such Disability or death; provided, however, that Participant shall still be eligible to receive a Retention Payment pursuant to the terms of Article V. (b) TERMINATION APART FROM CHANGE OF CONTROL. In the event that a Participant's employment is terminated for any reason, either prior to the occurrence of a Change of Control or after the twelve (12)-month period following a Change of Control, then the Participant shall be entitled to receive severance benefits only as may then be established under the Company's existing severance and benefit plans and policies at the time of such termination other than this Plan. 2. TIMING OF SEVERANCE PAYMENTS. Any Severance Payment to which a Participant is entitled shall be paid by the Company in a lump sum within ten (10) business days after the Participant's termination date. ARTICLE V RETENTION PAYMENTS 1. RIGHT TO RETENTION PAYMENTS. If (i) a Participant remains employed by the Company for ninety (90) days after a Change of Control, or (ii) a Participant's employment with the Company is terminated due to the death or Disability of the Participant following a Change of Control but prior to ninety days after a Change of Control, then the Participant shall be entitled to receive a -5- Retention Payment equal to two weeks' of his or her Base Salary multiplied by 33.33% for each full year of service with the Company or an entity acquired by the Company as of the date of the Change of Control, with a minimum Retention Payment equal to one months' Base Salary and a maximum Retention Payment equal to four months' Base Salary. EXAMPLE: A Change of Control is consummated on June 15, 1997. Participant remains employed with the Company for ninety (90) days following the Change of Control. Participant's Base Salary is $1,000 per week ($52,000 per year). The Participant's Retention Payment would be ($2,000 x 33.33% x 3) = $1999.80. However, this amount is less than one months' Base Salary, which equals $4,333.33 Therefore the Participant is entitled to a Retention Payment of $4333.33. 2. TIMING OF RETENTION PAYMENTS. Any Retention Payment to which a Participant is entitled shall be paid by the Company in a lump sum within ten (10) business days after the ninetieth (90th) day after a Change of Control. ARTICLE VI EMPLOYMENT STATUS; WITHHOLDING 1. EMPLOYMENT STATUS. This Plan does not constitute a contract of employment or impose on the Participant or the Company any obligation to retain the Participant as an Employee, to change the status of the Participant's employment, or to change the Company's policies regarding termination of employment. The Participant's employment is and shall continue to be at-will, as defined under applicable law. If the Participant's employment with the Company or a successor entity terminates for any reason, including (without limitation) any termination prior to a Change of Control, the Participant shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Plan, or as may otherwise be available in accordance with the Company's established employee plans and practices or other agreements with the Company at the time of termination. 2. TAXATION OF PLAN PAYMENTS. All amounts paid pursuant to this Plan shall be subject to regular payroll and withholding taxes. ARTICLE VII SUCCESSORS TO COMPANY AND PARTICIPANTS 1. COMPANY'S SUCCESSORS. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Plan and agree expressly to perform the obligations under this Plan by executing a written agreement. For all purposes under this Plan, the term "Company" shall include any successor to the Company's business -6- and/or assets which executes and delivers the assumption agreement described in this subsection or which becomes bound by the terms of this Plan by operation of law. 2. PARTICIPANT'S SUCCESSORS. All rights of the Participant hereunder shall inure to the benefit of, and be enforceable by, the Participant's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. ARTICLE VIII DURATION, AMENDMENT AND TERMINATION 1. DURATION. This Plan shall terminate on August 20, 1998 unless (i) extended by the Board, or (ii) a Change of Control occurs prior to August 20, 1998. If a Change of Control occurs prior to August 20, 1998, then this Plan shall terminate upon the earlier of (i) the date that all obligations of the Company or successor entities hereunder have been satisfied, or (ii) twelve (12) months after a Change of Control, unless sooner terminated as provided in this Article VIII. A termination of this Plan pursuant to the preceding sentences shall be effective for all purposes, except that such termination shall not affect the payment or provision of compensation or benefits earned by a Participant prior to the termination of this Plan. 2. AMENDMENT AND TERMINATION. The Board of the Company shall have the discretionary authority to amend the Plan in any respect, including as to the removal or addition of Participants, by resolution adopted by a majority of the Board of the Company, unless a Change of Control has previously occurred. The Plan may be terminated by resolution adopted by a majority of the Board, unless a Change of Control has previously occurred. If a Change of Control occurs, the Plan and the designation of Participants thereto shall no longer be subject to amendment, change, substitution, deletion, revocation or termination in any respect whatsoever. ARTICLE IX PLAN ADMINISTRATION 1. APPEAL. A Participant or former Participant who disagrees with their allotment of benefits under this Plan may file a written appeal with the designated Human Resources representative. Any claim relating to this Plan shall be subject to this appeal process. The written appeal must be filed within sixty (60) days of the Participant's termination date. The appeal must state the reasons the Participant or former Participant believes he or she is entitled to different benefits under the Plan. The designated Human Resources representative shall review the claim. If the claim is wholly or partially denied, the designated Human Resources representative shall provide the Participant or former Participant a written notice of the denial, specifying the reasons the claim was denied. Such notice shall be provided within ninety (90) days of receiving the written appeal. -7- If the claim is denied, in whole or in part, the Participant may request a review of the denial at any time within ninety (90) days following the date the Participant received written notice of the denial of his or her claim. For purposes of this subsection, any action required or authorized to be taken by the Participant may be taken by a representative authorized in writing by the Participant to represent him or her. The designated Human Resources representative shall afford the Participant a full and fair review of the decision denying the claim and, if so requested, shall: (a) Permit the Participant to review any documents that are pertinent to the claim; (b) Permit the Participant to submit to the designated Human Resources representative issues and comments in writing; and (c) The decision on review by the designated Human Resources representative shall be in writing and shall be issued within 60 days following receipt of the request for review. The decision on review shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision of the designated Human Resources representative is based. 2. ARBITRATION. If the appeal of a Participant or former Participant is denied, or if the outcome of said appeal is unsatisfactory to the Participant or former Participant, the sole remedy hereunder shall be arbitration as set forth below. Any dispute or controversy arising under or in connection with the Plan shall be settled by arbitration in accordance with the rules of the American Arbitration Association then in effect, conducted before a panel of three arbitrators sitting in a location selected by the Participant within fifty (50) miles from the location of his or her job with the Company. In consideration for the Participant's or former Participant's waiver of their right to litigate any such dispute or controversy in a court of law, and notwithstanding any contrary provisions of California law regarding allocation of attorney fees, costs and expenses in arbitration proceedings, the Company agrees to pay, on a monthly basis, the reasonable attorney fees, costs and expenses (with such reasonableness determined by the arbitrator) incurred in good faith by the Participant or former Participant in connection with any such arbitration regardless of the outcome of the arbitration. Judgment may be entered on the arbitrator's award in any court having jurisdiction. If the Participant or former Participant is the prevailing party or recovers any damages in such arbitration, he or she shall be entitled to receive, in addition thereto, pre- judgment and post-judgment interest. Punitive damages shall not be awarded. ARTICLE X NOTICE 1. GENERAL. Notices and all other communications contemplated by this Plan shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the -8- Participant, mailed notices shall be addressed to him or her at the home address which he or she most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its General Counsel. 2. NOTICE OF TERMINATION BY THE COMPANY. Any termination by the Company of the Participant's employment with the Company at any time within twelve (12) months following a Change of Control shall be communicated by a notice of termination to the Participant at least five (5) days prior to the date of such termination (or at least thirty (30) days prior to the date of a termination by reason of the Participant's Disability). Such notice shall indicate the specific termination provision or provisions in this Plan relied upon (if any), shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision or provisions so indicated, and shall specify the termination date. ARTICLE XI MISCELLANEOUS PROVISIONS 1. NO DUTY TO MITIGATE. The Participant shall not be required to mitigate the amount of any payment contemplated by this Plan, nor shall any such payment be reduced by any earnings that the Participant may receive from any other source. 2. SEVERABILITY. The invalidity or unenforceability of any provision or provisions of this Plan shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. 3. NO ASSIGNMENT OF BENEFITS. The rights of any person to payments or benefits under this Plan shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this subsection shall be void. 4. TAX WITHHOLDING. All payments made pursuant to this Plan will be subject to withholding of applicable income and employment taxes. 5. ASSIGNMENT BY COMPANY. The Company may assign its rights under this Plan to an affiliate, and an affiliate may assign its rights under this Plan to another affiliate of the Company or to the Company; provided, however, that no assignment shall be made if the net worth of the assignee is less than the net worth of the Company at the time of assignment; provided, further, that the Company shall guarantee all benefits payable hereunder. In the case of any such assignment, the term "Company" when used in this Plan shall mean the corporation that actually employs the Participant. -9- ARTICLE XII ERISA REQUIRED INFORMATION 1. PLAN SPONSOR. The Plan sponsor and administrator is: Circon Corporation 6500 Hollister Avenue Santa Barbara, California 93117 (805) 685-5100 2. DESIGNATED AGENT. Designated agent for service of process: General Counsel Circon Corporation 6500 Hollister Avenue Santa Barbara, California 93117 3. PLAN RECORDS. Plan records are kept on a fiscal year basis. 4. PLAN FUNDING. The Plan is funded from the Company's general assets. -10- CIRCON CORPORATION MANAGERS, PROFESSIONALS & KEY CONTRIBUTORS RETENTION PLAN NOTICE OF PARTICIPATION TO: [NAME OF PARTICIPANT] DATE: August 27, 1996 The Board of Directors of the Company has designated you as a Participant in the Circon Corporation Managers, Professionals & Key Contributors Retention Plan (the "Plan"), a copy of which is attached. The initially capitalized terms used in this Notice are formally defined in the Plan, so you should look in the Plan for their precise meaning. The Plan provides you with retention and severance payments in the event of a Change of Control of the Company. It provides for a potential cash payment of a minimum of three months' base salary up to a maximum of one year's base salary. Subject to these minimum and maximum limits, the Plan provides for two weeks' base salary for each full year you have been employed with the Company (or with an entity acquired by the Company) up to and including the date of a Change of Control. The retention payment component equals one-third of the total potential cash payment. It will be paid to you if ninety days following a Change of Control you have remained employed by the Company or the acquirer. The retention payment is also triggered if you are involuntarily terminated without Cause after a Change of Control but prior to 90 days following a Change of Control. The severance payment component equals two-thirds of the total potential cash payment. It will be paid to you only if you are involuntarily terminated without Cause within twelve months following a Change of Control. This Notice is just intended to summarize the Plan provisions, not to change the provisions of the Plan or your participation in the Plan. The specific terms and conditions of your participation in the Plan are set forth in the attached Plan. Please retain a copy of this Notice of Participation, along with the Plan, for your records. Should you have any questions regarding this Notice of Participation or the Plan, please do not hesitate to contact Bruce Thompson at 805-961-1650. EX-4 5 EXH 4 - ARTICLE NINTH OF CERTIFICATE EXHIBIT 4 ARTICLE NINTH OF THE COMPANY'S CERTIFICATE OR INCORPORATION, AS AMENDED NINTH: To the fullest extent permitted by the Delaware General Corporation Law as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Neither any amendment nor repeal of this Certificate of Incorporation inconsistent with this Article NINTH, nor the adoption of any provision of Article NINTH, shall eliminate or reduce the effect of this cause of action, suit or claim that, but for this Article NINTH, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. EX-5 6 EXH 5 - ARTICLE V OF THE BYLAWS EXHIBIT 5 ARTICLE V OF THE COMPANY'S BYLAWS ARTICLE V COMPENSATION; INDEMNIFICATION 5.1 DIRECTORS' FEES AND EXPENSES 5.1.1 COMPENSATION. Directors and committee members may receive such compensation, if any, for their services, and may be reimbursed for expenses incurred by them on behalf of the Corporation, in the manner and to the extent provided in resolutions duly adopted by the Board of Directors. 5.1.2. OFFICER COMPENSATION. This Section 5.1 shall not preclude any director from also serving as an officer, employee or agent of the Corporation and receiving compensation from the Corporation for such services. 5.2 COMPENSATION OF OFFICERS The compensation of the officers of the Corporation shall be fixed from time to time by the Board of Directors or by the Chairman of the Board, subject to any rights of the officer pursuant to any employment contract between that officer and the Corporation. 5.3 INDEMNIFICATION OF AGENTS 5.3.1 RIGHT TO INDEMNIFICATION. Each person who was or is made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ("proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative, is or was a director, officer or employee of the Corporation of is or was serving at their request of the Corporation as a director, officer or employee of another corporation, or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer or employee or in any other capacity while serving as a director, officer or employee, shall be indemnified and held harmless by the Corporation in the fullest extent authorized by Delaware Law, as the name exists or may hereafter by amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide prior to such amendment) against all expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, amounts paid or to be paid in settlement and amounts expended in seeking indemnification granted as such person under applicable law, this Bylaw or any agreement with the Corporation; reasonably incurred or suggested by such person in connection therewith and such indemnification shall continue as to person who has ceased to be a director, officer or employee and shall inure to the benefit of his or her heirs, executors and the Corporation shall indemnify and such person seeking indemnity in connection with an action, suit or proceeding (or part thereof) initiated by such person only of such action, suit or proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. Such right shall be a contract right, shall attach even if such indemnification would otherwise be discretionary under Delaware Law, and shall include the right to be paid, by the Corporation, expenses incurred in defending any such proceeding in advance of its final disposition; PROVIDED, HOWEVER, that if the Delaware General Corporation Law then so requires, the payment of such expenses incurred by a director or officer of the Corporation in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director of officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of such proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or behalf of such director or officer, to repay all amounts so advanced if it should be determined ultimately that such director or officer is not entitled to be indemnified under this Section or otherwise. 5.3.2 RIGHT OF CLAIMANT TO BRING SUIT. If a claim under Section 5.3.1 is not paid in full by the Corporation within twenty (20) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if such suit is not frivolous or brought in bad faith, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses, incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to this Corporation) that the claimant has not met the standards of conduct which makes it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has med the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. 5.3.3 NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person in Section 5.3.1 and 5.3.2 shall not be exclusive of any other right which such persons may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaw, agreement, vote of stockholders or disinterested directors or otherwise. 5.3.4 INDEMNIFICATION CONTRACTS. The Board of Directors is authorized to enter into a contract with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing for indemnification rights equivalent to or, if the Board of Directors so determines, greater than those provided for in this Article V. -2- 5.3.5 INSURANCE. The Corporation shall maintain insurance to the extent reasonably available, at its expense, to protect itself and any such director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. 5.3.6 EFFECT OF AMENDMENT. Any amendment, repeal or modification of any provision of this Article V by the stockholders and the directors of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such amendment, repeal or modification. -3- EX-6 7 EXH 6 - FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 6 CIRCON CORPORATION FORM OF INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is effective as of _____________ by and between Circon Corporation, a Delaware corporation (the "Company"), and _______________ ("Indemnitee"). WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve the Company and its related entities; WHEREAS, in order to induce Indemnitee to continue to provide services to the Company, the Company wishes to provide for the indemnification of, and the advancement of expenses to, Indemnitee to the maximum extent permitted by law; WHEREAS, the Company and Indemnitee recognize the continued difficulty in obtaining liability insurance for the Company's directors, officers, employees, agents and fiduciaries, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance; WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited; and WHEREAS, the Company and Indemnitee desire to continue to have in place the additional protection provided by an indemnification agreement and to provide indemnification and advancement of expenses to the Indemnitee to the maximum extent permitted by Delaware law; WHEREAS, in view of the considerations set forth above, the Company desires that Indemnitee shall be indemnified and advanced expenses by the Company as set forth herein; NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below. 1. CERTAIN DEFINITIONS. (a) "Change in Control" shall mean, and shall be deemed to have occurred if, on or after the date of this Agreement, (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 50% of the total voting power represented by the Company's then outstanding Voting Securities, (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Company approve 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 80% 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 the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of related transactions) all or substantially all of the Company's assets. (b) "Claim" shall mean with respect to a Covered Event: any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other. (c) References to the "Company" shall include, in addition to Circon Corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger to which Circon Corporation (or any of its wholly owned subsidiaries) is a party which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (d) "Covered Event" shall mean any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or any subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on the part of Indemnitee while serving in such capacity. -2- (e) "Expenses" shall mean any and all expenses (including attorneys' fees and all other costs, expenses and obligations incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, to be a witness in or to participate in, any action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation), judgments, fines, penalties and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld), actually and reasonably incurred, of any Claim and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement. (f) "Expense Advance" shall mean a payment to Indemnitee pursuant to Section 3 of Expenses in advance of the settlement of or final judgement in any action, suit, proceeding or alternative dispute resolution mechanism, hearing, inquiry or investigation which constitutes a Claim. (g) "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 2(d) hereof, who shall not have otherwise performed services for the Company or Indemnitee within the last three years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements). (h) References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. (i) "Reviewing Party" shall mean, subject to the provisions of Section 2(d), any person or body appointed by the Board of Directors in accordance with applicable law to review the Company's obligations hereunder and under applicable law, which may include a member or members of the Company's Board of Directors, Independent Legal Counsel or any other person or body not a party to the particular Claim for which Indemnitee is seeking indemnification. (j) "Section" refers to a section of this Agreement unless otherwise indicated. (k) "Voting Securities" shall mean any securities of the Company that vote generally in the election of directors. 2. INDEMNIFICATION. -3- (a) INDEMNIFICATION OF EXPENSES. Subject to the provisions of Section 2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest extent permitted by law if Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any Claim (whether by reason of or arising in part out of a Covered Event), including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses. (b) REVIEW OF INDEMNIFICATION OBLIGATIONS. Notwithstanding the foregoing, in the event any Reviewing Party shall have determined (in a written opinion, in any case in which Independent Legal Counsel is the Reviewing Party) that Indemnitee is not entitled to be indemnified hereunder under applicable law, (i) the Company shall have no further obligation under Section 2(a) to make any payments to Indemnitee not made prior to such determination by such Reviewing Party, and (ii) the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all Expenses theretofore paid in indemnifying Indemnitee; PROVIDED, HOWEVER, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee is entitled to be indemnified hereunder under applicable law, any determination made by any Reviewing Party that Indemnitee is not entitled to be indemnified hereunder under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expenses theretofore paid in indemnifying Indemnitee until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any Expenses shall be unsecured and no interest shall be charged thereon. (c) INDEMNITEE RIGHTS ON UNFAVORABLE DETERMINATION; BINDING EFFECT. If any Reviewing Party determines that Indemnitee substantively is not entitled to be indemnified hereunder in whole or in part under applicable law, Indemnitee shall have the right to commence litigation seeking an initial determination by the court or challenging any such determination by such Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and, subject to the provisions of Section 15, the Company hereby consents to service of process and to appear in any such proceeding. Absent such litigation, any determination by any Reviewing Party shall be conclusive and binding on the Company and Indemnitee. (d) SELECTION OF REVIEWING PARTY; CHANGE IN CONTROL. If there has not been a Change in Control, any Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), any Reviewing Party with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnification of Expenses under this Agreement or any other agreement or under the Company's Certificate of Incorporation or Bylaws as now or hereafter in effect, or under any other applicable law, if desired by Indemnitee, shall be Independent Legal Counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be entitled to be indemnified hereunder under applicable law -4- and the Company agrees to abide by such opinion. The Company agrees to pay the reasonable fees of the Independent Legal Counsel referred to above and to indemnify fully such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. Notwithstanding any other provision of this Agreement, the Company shall not be required to pay Expenses of more than one Independent Legal Counsel in connection with all matters concerning a single Indemnitee, and such Independent Legal Counsel shall be the Independent Legal Counsel for any or all other Indemnitees unless (i) the Company otherwise determines or (ii) any Indemnitee shall provide a written statement setting forth in detail a reasonable objection to such Independent Legal Counsel representing other Indemnitees. (e) MANDATORY PAYMENT OF EXPENSES. Notwithstanding any other provision of this Agreement other than Section 10 hereof, to the extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any Claim, Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in connection therewith. 3. EXPENSE ADVANCES. (a) OBLIGATION TO MAKE EXPENSE ADVANCES. Upon receipt of a written undertaking by or on behalf of the Indemnitee to repay such amounts if it shall ultimately be determined that the Indemnitee is not entitled to be indemnified therefor by the Company, the Company shall make Expense Advances to Indemnitee. (b) FORM OF UNDERTAKING. Any written undertaking by the Indemnitee to repay any Expense Advances hereunder shall be unsecured and no interest shall be charged thereon. (c) DETERMINATION OF REASONABLE EXPENSE ADVANCES. The parties agree that for the purposes of any Expense Advance for which Indemnitee has made written demand to the Company in accordance with this Agreement, all Expenses included in such Expense Advance that are certified by affidavit of Indemnitee's counsel as being reasonable shall be presumed conclusively to be reasonable. 4. PROCEDURES FOR INDEMNIFICATION AND EXPENSE ADVANCES. (a) TIMING OF PAYMENTS. All payments of Expenses (including without limitation Expense Advances) by the Company to the Indemnitee pursuant to this Agreement shall be made to the fullest extent permitted by law as soon as practicable after written demand by Indemnitee therefor is presented to the Company, but in no event later than forty-five (45) business days after such written demand by Indemnitee is presented to the Company, except in the case of Expense Advances, which shall be made no later than twenty (20) business days after such written demand by Indemnitee is presented to the Company. -5- (b) NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall, as a condition precedent to Indemnitee's right to be indemnified or Indemnitee's right to receive Expense Advances under this Agreement, give the Company notice in writing as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. (c) NO PRESUMPTIONS; BURDEN OF PROOF. For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of NOLO CONTENDERE, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by this Agreement or applicable law. In addition, neither the failure of any Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by any Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under this Agreement or applicable law, shall be a defense to Indemnitee's claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by any Reviewing Party or otherwise as to whether the Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. (d) NOTICE TO INSURERS. If, at the time of the receipt by the Company of a notice of a Claim pursuant to Section 4(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Claim in accordance with the terms of such policies. (e) SELECTION OF COUNSEL. In the event the Company shall be obligated hereunder to provide indemnification for or make any Expense Advances with respect to the Expenses of any Claim, the Company, if appropriate, shall be entitled to assume the defense of such Claim with counsel approved by Indemnitee (which approval shall not be unreasonably withheld) upon the delivery to Indemnitee of written notice of the Company's election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees or expenses of separate counsel subsequently employed by or on behalf of Indemnitee with respect to the same Claim; provided that, (i) Indemnitee shall have the right to employ Indemnitee's separate counsel in any such Claim at Indemnitee's expense and (ii) if (A) the employment of separate counsel by Indemnitee has -6- been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of Indemnitee's separate counsel shall be Expenses for which Indemnitee may receive indemnification or Expense Advances hereunder. 5. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY. (a) SCOPE. The Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder except as set forth in Section 10(a) hereof. (b) NONEXCLUSIVITY. The indemnification and the payment of Expense Advances provided by this Agreement shall be in addition to any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any other agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise. The indemnification and the payment of Expense Advances provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though subsequent thereto Indemnitee may have ceased to serve in such capacity. 6. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, provision of the Company's Certificate of Incorporation, Bylaws or otherwise) of the amounts otherwise payable hereunder. 7. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled. 8. MUTUAL ACKNOWLEDGEMENT. Both the Company and Indemnitee acknowledge that in certain instances, federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers, employees, agents or fiduciaries under this Agreement or otherwise. -7- Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 9. LIABILITY INSURANCE. To the extent the Company maintains liability insurance applicable to directors, officers, employees, agents or fiduciaries, Indemnitee shall be covered by such policies in such a manner as to provide Indemnitee the same rights and benefits as are provided to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee is not an officer or director but is a key employee, agent or fiduciary. 10. EXCEPTIONS. Notwithstanding any other provision of this Agreement, the Company shall not be obligated pursuant to the terms of this Agreement: (a) EXCLUDED ACTION OR OMISSIONS. To indemnify Indemnitee for Expenses resulting from acts, omissions or transactions for which Indemnitee is prohibited from receiving indemnification under this Agreement or applicable law; PROVIDED, HOWEVER, that notwithstanding any limitation set forth in this Section 10(a) regarding the Company's obligation to provide indemnification, Indemnitee shall be entitled under Section 3 to receive Expense Advances hereunder with respect to any such Claim unless and until a court having jurisdiction over the Claim shall have made a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that Indemnitee has engaged in acts, omissions or transactions for which Indemnitee is prohibited from receiving indemnification under this Agreement or applicable law. (b) CLAIMS INITIATED BY INDEMNITEE. To indemnify or make Expense Advances to Indemnitee with respect to Claims initiated or brought voluntarily by Indemnitee and not by way of defense, counterclaim or crossclaim, except (i) with respect to actions or proceedings brought to establish or enforce a right to indemnification under this Agreement or any other agreement or insurance policy or under the Company's Certificate of Incorporation or Bylaws now or hereafter in effect relating to Claims for Covered Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under Section 145 of the Delaware General Corporation Law, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification or insurance recovery, as the case may be. (c) LACK OF GOOD FAITH. To indemnify Indemnitee for any Expenses incurred by the Indemnitee with respect to any action instituted (i) by Indemnitee to enforce or interpret this Agreement, if a court having jurisdiction over such action determines as provided in Section 13 that -8- each of the material assertions made by the Indemnitee as a basis for such action was not made in good faith or was frivolous, or (ii) by or in the name of the Company to enforce or interpret this Agreement, if a court having jurisdiction over such action determines as provided in Section 13 that each of the material defenses asserted by Indemnitee in such action was made in bad faith or was frivolous. (d) CLAIMS UNDER SECTION 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute; PROVIDED, HOWEVER, that notwithstanding any limitation set forth in this Section 10(d) regarding the Company's obligation to provide indemnification, Indemnitee shall be entitled under Section 3 to receive Expense Advances hereunder with respect to any such Claim unless and until a court having jurisdiction over the Claim shall have made a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that Indemnitee has violated said statute. 11. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 12. BINDING EFFECT; SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), spouses, heirs and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect, and whether by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director, officer, employee, agent or fiduciary (as applicable) of the Company or of any other enterprise at the Company's request. 13. EXPENSES INCURRED IN ACTION RELATING TO ENFORCEMENT OR INTERPRETATION. In the event that any action is instituted by Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be indemnified for all Expenses incurred by Indemnitee with respect to such action (including without limitation attorneys' fees), regardless of whether Indemnitee is ultimately successful in such action, unless as a part of such action a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material assertions made by Indemnitee as a basis for such action was not made in good faith or was frivolous; provided, however, that until such final judicial determination is made, Indemnitee shall be entitled under Section 3 to receive payment of Expense Advances hereunder with respect to such action. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be indemnified for all Expenses incurred by Indemnitee in defense of such action (including without limitation costs and expenses incurred with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action a court having -9- jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material defenses asserted by Indemnitee in such action was made in bad faith or was frivolous; provided, however, that until such final judicial determination is made, Indemnitee shall be entitled under Section 3 to receive payment of Expense Advances hereunder with respect to such action. 14. NOTICE. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and signed for by the party addressed, on the date of such delivery, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 15. CONSENT TO JURISDICTION. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the Court of Chancery of the State of Delaware in and for New Castle County, which shall be the exclusive and only proper forum for adjudicating such a claim. 16. SEVERABILITY. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including without limitation each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 17. CHOICE OF LAW. This Agreement, and all rights, remedies, liabilities, powers and duties of the parties to this Agreement, shall be governed by and construed in accordance with the laws of the State of Delaware without regard to principles of conflicts of laws. 18. SUBROGATION. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 19. AMENDMENT AND TERMINATION. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed to be or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. -10- 20. INTEGRATION AND ENTIRE AGREEMENT. This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto. 21. NO CONSTRUCTION AS EMPLOYMENT AGREEMENT. Nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries or affiliated entities. IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement as of the date first above written. Circon Corporation By: -------------------------------------- Name: -------------------------------------- Title: -------------------------------------- Address: Circon Corporation 6500 Hollister Ave. Santa Barbara, California 93117 AGREED TO AND ACCEPTED -------------------------------------- -------------------------------------- -11- EX-7 8 EXH 7 - LETTER TO STOCK HOLDERS EXHIBIT 7 CIRCON CORPORATION 6500 HOLLISTER AVENUE SANTA BARBARA, CALIFORNIA 93117 August 18, 1997 TO THE STOCKHOLDERS OF CIRCON CORPORATION Dear Stockholder: As you may be aware, a second unsolicited tender offer (the "Offer") for all of the Common Stock of Circon Corporation (the "Company") at $16.50 per share was commenced on August 5, 1997, by United States Surgical Corporation ("USS") through its wholly-owned subsidiary, USS Acquisition Corp. Your Board of Directors has carefully considered the Offer and has determined that it is not in the best interest of the Company and its stockholders. YOUR BOARD RECOMMENDS THAT YOU AND ALL OTHER STOCKHOLDERS REJECT THE USS OFFER. The Board has determined that the Company should continue to pursue its strategic plan and that the Company is not for sale at this time. In particular, the Board has determined that the Company's strategic plan offers the potential for greater long-term benefits for the Company's stockholders than the Offer. In reaching its conclusion, your Board of Directors took into account a number of factors, including the Board's belief that the tender offer does not reflect the long-term values inherent in the Company. The Board also considered the Company's prospects for future growth and profitability, the numerous conditions to which the Offer is subject and the disruptive effect the consummation of the Offer could have on the Company's employees, suppliers and customers. In addition, the Board considered the August 15, 1997 opinion of Bear, Stearns & Co. Inc., the Company's financial advisor, to the effect that, as of the date of the opinion and based upon the assumptions stated therein, the consideration offered pursuant to the Offer is inadequate from a financial point of view to the Company's stockholders (other than USS). Enclosed for your information is a copy of your Company's Schedule 14D-9 which contains information concerning your Board's recommendation against the Offer and which has been filed today with the Securities and Exchange Commission. Very truly yours, Richard A. Auhll CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER EX-8 9 EXH 8 - PRESS RELEASE ANNOUNCING EXHIBIT 8 FOR IMMEDIATE RELEASE: CIRCON BOARD REJECTS U.S. SURGICAL TENDER OFFER BOARD ANNOUNCES PLANS TO ACTIVELY EXPLORE STRATEGIC ALTERNATIVES SANTA BARBARA, CALIFORNIA (AUGUST 18, 1997) - Circon Corporation (NASDAQ-NMS: CCON) announced today that its Board of Directors has recommended that Circon shareholders reject U.S. Surgical's (NYSE: USS) tender offer for all of the outstanding shares of Circon at $16.50 per share, and that shareholders not tender their shares to U.S. Surgical pursuant to the tender offer. The Board concluded that the U.S. Surgical offer, commenced on August 5, 1997, is inadequate and not in the best interests of Circon shareholders. In arriving at its determination, the Board gave careful consideration to a number of factors, including the opinion of the investment banking firm of Bear, Stearns & Co. Inc., the Company's financial advisor, that the offer by U.S. Surgical was inadequate from a financial point of view to the Circon shareholders other than U.S. Surgical. Circon is the leading U.S. supplier of products for minimally invasive urological and gynecological surgery, including such hardware and endoscopes and video systems, such disposable products as urological stents, laparoscopic suction-irrigation devices, and a wide variety of gynecological products. ### CONTACT: Judith Wilkinson / Matthew Sherman Abernathy MacGregor Group (212) 371-5999 EX-9 10 EXH 9 - BEAR STEARNS OPINION [LETTERHEAD] August 15, 1997 Circon Corporation 6500 Holister Avenue Santa Barbara, CA 93117-3019 Attention: Mr. Richard A. Auhll Chairman, President and Chief Executive Officer Ladies and Gentlemen: We understand that USS Acquisition Corp., a wholly owned subsidiary of United States Surgical Corporation (together, "U.S. Surgical"), has commenced a tender offer (the "Revised U.S. Surgical Tender Offer") to acquire all of the outstanding shares of common stock (the "Shares") of Circon Corporation ("Circon" or the "Company") for $16.50 net per share in cash, as more fully described in U.S. Surgical's Schedule 14D-1 and related Offer to Purchase dated August 5, 1997 (collectively, the "Revised U.S. Surgical Tender Offer Documents"). We understand that Circon plans to file its Schedule 14D-9 in response to the Revised U.S. Surgical Tender Offer on or about August 18, 1997 in substantially the form which has been furnished to us. You have asked for our opinion as to whether the consideration to be offered for the Shares pursuant to the Revised U.S. Surgical Tender Offer is adequate, from a financial point of view, to the shareholders of Circon (excluding U.S. Surgical and its affiliates). In the course of performing our review and analyses for rendering this opinion, we have: 1. reviewed the Revised U.S. Surgical Tender Offer Documents and Circon's Schedule 14D-9 in substantially the form expected to be filed on or about August 18, 1997; 2. reviewed Circon's Annual Reports to Shareholders and Annual Reports on Form 10-K for the years ended December 31, 1993 through 1996, and its Quarterly Reports on Form 10-Q for the periods ended March 31, 1997 and ended June 30, 1997; 3. reviewed certain operating and financial information, including revised projections, provided to us by management relating to Circon's businesses and prospects; 4. met with certain members of Circon's senior management to discuss the Company's operations, historical financial performance (including, among other things, the factors Circon Corporation August 15, 1997 Page 2 underlying the Company's financial performance during the past seven quarters), financial condition and future prospects; 5. reviewed the historical prices, valuation multiples and trading volume of the Shares; 6. reviewed the terms of selected precedent mergers and acquisitions of companies which we deemed generally comparable to Circon; 7. performed discounted cash flow analyses on the revised projections furnished to us by Circon; 8. reviewed publicly available financial data, stock market performance data and valuation multiples of companies which we deemed generally comparable to Circon; 9. considered that (a) U.S. Surgical had made several previous tender offers for the Shares wherein the cash consideration offered was higher than the $16.50 per Share being offered pursuant to the Revised U.S. Surgical Tender Offer and (b) various strategic acquirors and/or strategic investors had approached Bear Stearns and/or the Company on an unsolicited basis during the past year and expressed an interest in discussing a potential acquisition or other extraordinary transaction if the Board of Directors of the Company were to determine to alter its strategic plans and pursue such alternatives, although no specific values for the Company were discussed; and 10. conducted such other studies, analyses, inquiries and investigations as we deemed appropriate. In the course of our review, we have relied upon and assumed the accuracy and completeness of the financial and other information provided to us by Circon. With respect to Circon's revised projected financial results, we have assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the senior management of Circon as to the Company's expected future performance. We have not assumed any responsibility for the information or revised projections provided to us and we have further relied upon the assurances of the senior management of Circon that it is unaware of any facts that would make the information or revised projections provided to us incomplete or misleading. In arriving at our opinion, we have not performed, nor have we been furnished with, any independent appraisal of the assets or liabilities of Circon. Our opinion is necessarily based on economic, market and other conditions, and the information made available to us, as of the date hereof. We have been advised by the Company that its Board of Directors has determined that the present is not a propitious time to sell the Company because of the Board's view that the near term operating performance of the Company will improve significantly. We express no opinion as to the Board's determination in this regard and this opinion should not be construed as any expression of views as to the future operating performance of the Company or market prices of the Shares. Our opinion as to the adequacy, from a financial point of view, of the consideration offered in the Revised U.S. Surgical Tender Offer is based in large part upon our views as to the consideration that might be paid by a willing strategic buyer for the entire Company in a negotiated transaction based upon the synergies and cost savings that might be achieved by such a transaction and other relevant considerations. Circon Corporation August 15, 1997 Page 3 It is understood that this letter is for the information of the Board of Directors of the Company and does not constitute a recommendation to any holder of Shares as to whether to tender Shares pursuant to the Revised U.S. Surgical Tender Offer. This letter may not be used for any other purpose, or be reproduced, disseminated, quoted or referred to at any time, in whole or in part, without our prior written consent; provided, however, that this letter may be included in its entirety in the Schedule 14D-9 to be distributed to the holders of the Shares in connection with the Revised U.S. Surgical Tender Offer. Based on the foregoing, it is our opinion that the consideration to be offered for the Shares pursuant to the Revised U.S. Surgical Tender Offer is inadequate, from a financial point of view, to the shareholders of Circon (excluding U.S. Surgical and its affiliates). Very truly yours, BEAR, STEARNS & CO. INC. By: /s/ --------------------------------- Senior Managing Director -----END PRIVACY-ENHANCED MESSAGE-----